Before we start, two quick questions:
- What score would you give your current cash flow management?
- Is cash flow management high on your list of priorities in running your business?
According to Richard Branson one should “Never take your eyes off the cash flow because it is the life blood of your business.” It is commonly known that many small businesses fail as a result of poor cash flow planning. In my experience, business owners focus too much on profit and not enough on cash flow, or sometimes the other way around. As a result they are making important decisions without the full picture.
At a basic level, profit is the difference between income and expenditure. It is exclusive of VAT and is not affected by changes in liabilities or assets (unless you sell an asset for a profit/loss). The profit measure tells you how sustainable your business is and if your margins are adequate i.e. are you selling your goods and services at prices high enough to cover the cost of providing those goods and services. But in the end, a sale is not a sale until it has been paid, hence monitoring actual cash resources within the business is essential.
Meet “Tersia”, a small business owner operating in the cut flower industry. Tersia employs 5 permanent staff and 3 seasonal staff. She has a contract supplying cut flowers to several supermarkets in KZN as well as a few cash customers. The business is VAT registered, and she pays her suppliers 14 days from invoice and the supermarkets pay her 60 days from statement. Her business has a bank loan which is repaid monthly together with interest. For several months Tersia has barely had enough cash at month end to pay her salary obligations let alone her creditors and long term debt obligations. She has asked for help with managing her cash flow…
Tersia: So, what is a cash flow plan?
Kerryn: A cash flow plan is a future picture of your business’ ability to pay for its operating expenses, compliance costs (e.g. PAYE, VAT, Income Tax, Workmans’ Compensation etc.), creditors, asset purchases, debt repayments and finance costs i.e. it shows actual cash inflows and outflows and a forecasted bank balance. A cash flow regularly changes and is quite difficult to predict.
Tersia: What does cash flow planning involve?
Kerryn: Cash flow planning includes two activities. Firstly, forecasting cash inflows and outflows with a running bank balance several months ahead, preferably for the coming financial year. In essence, it is a picture of how you expect your bank balance to change month by month. Looking at your cash flow story over a longer time period will help you to see where there may be possible problems which will give you time to address them.
Secondly, tracking the actual inflows and outflows allows you to monitor to see whether there will be enough cash in your account at the end of the month to meet those all-important payments.
Unfortunately cash flow planning can be time consuming and it is best to follow some kind of system. It may be clumsy at first, but the more disciplined you are, the easier it will get. Start by using what is easily available to you e.g. drawing up an Excel spreadsheet. This will help you to understand how your cash flow moves month on month.
Tersia: So what’s the point? Will it be worth it? It sounds like a heap of work!
Kerryn: Nothing worthwhile ever comes easy! Cash flow management is the backbone of your business. Jack Welch, former CEO of General Electric, said “If I had to run a company on three measures, it would be customer satisfaction, employee satisfaction and cash flow management.” So besides offering peace of mind as each month end approaches, as well as those statutory payment dates, it can support your strategic thinking in the following ways:
- How can you increase your cash inflows? Do you need to diversify your customer portfolio and create a recurring revenue stream? How effective are your marketing and sales efforts? Are your products priced correctly?
- What about your expenses? Are they under control and within budget?
- Can you negotiate longer terms with your suppliers and shorter terms with your customers? At the moment you are paying your suppliers before your customers pay you which puts severe pressure on your cash flow. Consider offering your customers discounts for early payment.
- Are you providing for your VAT payments every second month? – consider opening a call account for the VAT portion of your monthly sales so that the cash is available should a VAT payment fall due.
- Do you need to restructure your debt obligations to ease the pressure of your monthly repayments?
- Are you providing for business growth? How do the different growth scenarios impact your business cash flow?
In the current economic climate in South Africa, business owners need to pay attention to the risks they face and manage the risks carefully. Keeping a close eye on your cash flow and ensuring it is a key consideration in your strategic thinking will go a long way in helping you navigate these tough economic times.
In closing, Robert Kiyosaki once said, “Making more money will not solve your problems if cash flow management is your problem.”
If you are struggling in this area, reach out for help. As a Valueneurs Mentor Coach, I can assist you in navigating this important aspect of your business.
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