Cash flow is the lifeblood of every business. Without cash, it’s hard to purchase inventory, pay employees, and ultimately keep the doors open. In fact, according to the NCR, most SMEs in South Africa do not last more than two years due to poor cash flow management in their businesses.
I believe there is one simple way at looking at the cash flow of your business. If your expenses exceed your cash, then you have a cash flow problem. Let’s use a metric to help us simplify the above. Cash flow, or working capital, is your current assets minus your current liabilities.
Current assets can be defined as cash in your bank account, stock on hand/inventory, any property you own, accounts receivable and any other asset that you have that will enable you to do business, such as machinery.
Your current liabilities can be defined as any loans that business took, any long term and current payables, line of credit or any other debt the business has.
If you divide your current liabilities into the current assets, that will give you a ratio. In a perfect world, your assets should be twice the amount of liabilities (2:1). However, being small business owners in South Africa ourselves, we understand the way business works and sometimes theory differs from reality, therefore any asset ratio that is above liability is a healthy business. On paper, if the cash flow ratio of your business is below 1:1, then that shows that it is costing you more money to operate your business than you are taking in and that will eventually lead to problems. Even if you have cash in the bank at the end of the month, if your cash flow ratio is below 1:1, then that cash will soon run out.
Below, we have listed a few cash flow tricks which are realistic, to help you better your ratio as well as run a healthier business.
1. Know your break-even point
This is, one of the most important measures in a business. To know your break-even point, can assure that you and the business will head in the right direction. It can act as a goal for your business to reach and if turn, better manage your cash flow. If you focus on your break-even goal, it will make you smarter in the way in which you spend money and manage money.
2. Agree on clear payment terms
Most businesses require a service or product from another business or sell a service or product to another business. This can be a huge obstacle in a business’s operational cash flow. From the one end, you can provide a service or a product and only get paid in 90 days from invoice and on the other end you can purchase a service or a product and be pressurized to pay a COD (cash on delivery). In either case, you should try manipulate the situation to best suit your business.
3. Use technology to assist you in managing your cashflow
Managing and predicting inflow of cash vs outflow of cash can be a time consuming and strenuous task for any business owner. Sitting in the office and punching in numbers can be something that any busy business owner will resent, even though it is a vital aspect of any business. Therefore, using technology and software to assist you in this process, is very important. Tools such as Sage and Xero can help you always maintain a bird’s eye view on your cash flow at all times, which can help your business in many aspects.
4. Consider financial assistance
As a business owner, there are many times where you have a quiet patch which digs your business into a cashflow hole that sometimes you cannot see yourself coming out of. Or, looking at your bank account at the end of the month and realizing that you have a healthy business but you have too much money tied up in stock that you do not have cash to pay suppliers or staff. Looking for a short term loan will be the best option to help you get back on your feet. Either from a bank or an alternative lending institution, getting a cash injection can make or break your business. Wherever you get funds from, make sure the funds are received as quickly as possible and at the best rate as possible.
5. Invoice quickly
Make sure you invoice quickly for the service or product you have provided. It’s a simple formula, if you invoice a week and a half after delivering of the service or product, then you will only get paid a week and a half later than you would have for that service or product. That means that the money will be in your account a week and a half later than it should have and that can make your business run into cash flow problems.
6. Offer discounts to collect payments earlier
This is a trick that can help many small businesses in South Africa. There is no use having money owed to you sitting in other peoples’ bank accounts and then your business will be under pressure at the end of the month. Provide a discount for customers paying early and that way, your margins might decrease but your bank balance will always be healthy and in good standings.