Entrepreneurs should view investing in a business as a form of saving, a South Africa-based expert said this week.
“As entrepreneurs we constantly battle with the dilemma of trying to save money versus investing it back into our businesses,” Charles Meyerowitz, co-founder and CEO of specialty asset backed financier Lamna, said.
“It’s important that SMEs and entrepreneurs see efforts to invest in their businesses as a form of saving. However, understanding the different types of savings needs within the business, and how to achieve these, is critical.”
Meyerowitz said one of the most challenging issues SMEs struggled with was managing their cash flow and prioritising what to spend money on. This includes, he added, anything from putting money towards marketing the business, purchasing assets or growing the staff contingent.
“Making these decisions ultimately means deciding whether the spend will be worthwhile, whether it could yield better return on investment being spent elsewhere or if it should rather be saved,” Meyerowitz explained.
According to Meyerorwitz, a common dilemma SMEs face is trying to balance building the business while attempting to allocate funds as a cash cushion.
“This is dependent on the maturity of the business. At the early stage, everything is invested into the business and as the business matures, one should look at balancing reinvestment in the business with building reserves.”
Meyerorwitz emphasised the importance of understanding the two broad types of saving within a business – expenditure efficiency and cash reserves.
“Expenditure efficiency looks at spending money on things that are important in the business and not making unnecessary purchases,” he explains.
“It is important for SMEs to evaluate their spending regularly and then to put processes in place to ensure there is no unnecessary purchasing.
“Investing in the growth of the business, invest in property (maybe even purchasing the current premises) or even investing in assets could be considered a savings mechanism if these investments will reap long term returns for the business. Assets have fluctuating values, which means that they could be at a higher value when you decide to resell them.”
The other form of saving is cash reserves, which Meyerorwitz said could take many forms. “Business owners could put cash aside or invest a monthly amount into an appropriate policy.”
Creating the optimal cash-flow environment means owners need to ensure that savings and investments are diversified sufficiently and that funding options do not incur excessive risk, he said.
“In many instances, SMEs are vulnerable as they need to take certain risks during the business life-cycle in order to make a success out of their business.
“When this happens, he believes that it is important to have alternative means of funding for the business that do not require taking on personal risk. A low risk option in this case is to identify and use ‘lazy assets’ for cash flow.
“Asset back lending is one of the alternate avenues of generating cash flow, which allows professionals to not only mitigate personal risk by avoiding the need for signing personally, but also enjoy immediate liquidity. This enables entrepreneurs to utilise their ‘lazy assets’ which are assets that most of the time are not being utilised to their full potential.”
He nevertheless admitted that running a business was tricky.
“You want to be successful and grow your business, but on the other hand, rushing growth will mean you cannot sustainably fund it by the rate that it is growing.”
It is vital to understand the needs of your business, be patient and making sure there is the correct profitability level in the trading activities you take on as a business, he concluded.
Photo: Gospel Justice Initiative