It is crucial that business owners know how to manage their cash flow effectively given the challenging economic environment small and business enterprises (SMEs) operate in, Lionel Billings, head of national Consulting Services at Business Partner Limited, said.
Businesses need to differentiate between profit and cash flow, he said, adding that many businesses are profitable, yet run out of money due to ineffective cash flow management.
“Many businesses generate substantial profit during a month as a result of orders or sales, but as payment often is not due for another 30 or 60 days, business owners sometimes find themselves in a situation where they do not have sufficient cash flow to continue operating, as they are unable to produce products or pay staff salaries,” Billings explained.
A few key areas business owners to watch out for include:
Have strict credit policies in place, as poor credit control can result in a business not receiving payment on time and in turn, could lead to the business defaulting on its obligations. It is also important to remember that larger enterprises often take longer to process invoices, which sometimes needs to be taken into account as late payment can have a drastic effect on SMEs.
If a business does not deliver its products or services on time, the invoice will not be paid. To avoid over promising to clients, a business’ workload needs to be planned properly.
Billings said other factors that could lead to cash flow problems include inefficient ordering systems, poor management accounting, inadequate supplier management and lack of control over gross profits or overheads.
The essence of successful cash flow management is the regulation of all money flowing in and out of a business, he said, adding that an increased, consistent cash flow will create a predictable business pattern, making it easier for a business to plan and budget for future growth.
He recommended the following tips to SMEs owners on how to increase their cash flow:
• Take the maximum amount of time assigned to pay suppliers:
This will result in interest-free credit for the business. Take advantage of early payment incentives: If you have cash available, take advantage of the discounts offered by suppliers. Also, enquire with all your suppliers as to whether they can offer a discount.
• Balance your client base:
Many service and professional companies, for example, accounts, work with certain clients on a project-by-project basis. Instead, rather try and convert these clients to a retainer relationship by offering some kind of incentive or value-added service. While this may reduce profit margins, it will make cash flow more predictable.
• Check your pricing:
Review your prices regularly in order to ensure that they are aligned with rising costs. Ensure you also monitor your competition on a consistent basis, as if they are charging higher prices, then perhaps you should too.
• Form a buying cooperative:
Do joint buying and buy in bulk with colleagues and/or other businesses in order to save on the products purchased.
Renegotiate insurance and supplier policies: Review insurance policies annually and regularly examine bills to ensure you are getting the best possible deal. Ensure that you keep a close eye on price sensitive services, such as internet access, as these can often change.
• Tighten your stock:
Reduce overstocking by calculating your business’ inventory turnover ratio (cost of goods sold divided by the average value of your inventory) and compare this with the industry norm.
• Consider leasing instead of buying:
Leasing generally costs more than buying, but these costs can often be justified by the cash flow benefits.
• Stick to a budget:
(Issued by Business Partners Limited, final editing by Issa Sikiti da Silva)