Your Business – May 01, 2018

FUNDING SNIPPETS

It's imperative to prioritise cash in your business.

Read on for some tips on how to better manage

this crucial element...

Cash flow is one of the major concerns

that keeps small business owners awake

at night. Indeed, few would argue that

having a good cash flow is the very

lifeblood needed to keep a business

going; and that without it, it won't be long

before the enterprise withers and dies.

WHAT MAKES CASH FLOW?

There are four components that make

up the cash "inflow" to your business.

These include the sales of products and

services, loans or credit card proceeds

(either that have been borrowed by the

business or in a personal capacity; as

well as money owed by debtors), asset

sales (vehicles, computers etc) and

dividends paid by owner investments. On

the flipside of this are the amounts that

cause cash to flow out of the business

• business expenditures (day-to-day
  running costs, salaries etc), loan or credit
  card payments, asset purchases and
  owner withdrawals (taken out of the
  business for personal use). Cash flow also
  fits into three main categories – operating
  (sales and expenses), investing (assets
  bought and sold) and financing (loans and
  withdrawals).

Understanding where and how your cash

flow takes place will give you a good

indication of how healthy your business

is. For example, most of the money that

you generate should be from the sale

of your product or service – if it's from

investing or financing, alarm bells should

sound that your business is not in a

sustainable situation.

Keep it flowing

KEEP IT HEALTHY

To get a good handle on your business's

cash flow, you need to have a "real-time"

grasp of where things are at – you cannot

simply wait till month-end to realise you

are out of cash; cash flow management

needs to be proactive rather than

reactive. A simple way to do this is to

use an accounting package to generate

a cash flow statement for you. Cash

flow projections are essential in order to

help you understand the way your cash

operates – what times of the month

will be "cash crunch" times and what

expenses need to be paid before then.

Knowing where your money is coming in

from and where your money is going out

is key to controlling your cash flow.

Once you've ascertained this pattern,

you can institute principles that will help

make provision for a healthy flow. These

might include:

▪ Matching debtor and creditor terms

Ideally, you'll be able to structure your

debtor and creditor terms in such a way

that cash is collected from debtors before

creditors are due to be paid. It is also

favourable to negotiate short payment

terms with your debtors (get the cash

in as quickly as you can) and longer

payment terms with your creditors (hold

on to the cash for as long as you can).

▪ Manage your clients

Considering the set-up above, when

you take on a big client you need to

check that they will be in a position to

pay you in the way that you need to be

paid. Check out their payment track

record and make sure that they are clear

on when and how you need to be paid –

for example, getting an electronic funds

transfer is quicker than waiting for that

cheque in the post.

▪ Consider a deposit or down payment

You can cushion the effects of a late/

uncertain payment by requesting an

upfront deposit from clients. It will

also help you to cover critical initial

expenses without having to rely on

working capital finance.

▪ Consider debtor finance

This financing option meets the needs

of businesses that need to free up

cash but don't want a traditional credit

facility. It essentially gives access to

funds against invoices that are yet to be

paid. This is a popular financing option

overseas but is still immature in the

South African market.

It's clear that keeping the cash flowing

in your business relies more on tenacity

and diligence than on rocket science.

Once you understand how the cash

works in your business, you can make

provision for the flows and manage it

to avoid a cash-dry situation. A lot of

cash flow management comes down

to speeding up your cash collection.

Do whatever it takes –write down your

terms from the start, invoice early, follow

up quickly and consistently, make it easy

for people to pay you – to get the cash in

as quickly as you can. Good luck!