Taking Control of Your Business Cash flow
Your business can be profitable yet lack cash. We have seen the likes of Uchumi, Nakumatt and more recently, Tuskys supermarkets all collapse because they were unable to properly manage their cash flow. I know you’re currently wondering: “if these huge businesses with certified public accountants, qualified management teams & board of directors were unable to adequately manage their cash flow, how easy is it for me and my enterprise?” Well, truth of the matter is, it’s not easy. It requires business owners to have a clear understanding of various financial aspects in their businesses (this is the 1st reason why we designed the Advanced Entrepreneurship Program AEP)
You need a 360-degree view of your business on a daily basis. You ought to understand both the inflow and outflow of CASH within your business. Most entrepreneurs think about the bottom line; what are our profits? But in as much as profits are important, a deeper scrutiny into your cash balances may reveal that your business may be running on fumes.
Cash is the blood in any company, if you have low blood levels then the hospital is the best place to be while if you have too much blood… I’m not quite sure whether such a condition exists. The point I am making is that too little cash will kill your business. At the same time, too much free/idle cash means you’re not efficiently utilizing your resources to generate more resources (this is the 2nd reason why AEP is of critical importance to entrepreneurs)
In order to properly diagnose your cash flow status, here are some snippets you can try out.
Allocate cash flow to your best financial advantage:
There is a difference between urgent and important invoices. Urgent invoices will frustrate you, ensuring you don’t have any peace of mind. It is difficult to maintain business as usual if you delay salaries or rent or taxes. You don’t want disgruntled employees while drafting your annual strategy. Calls from your landlord threatening to evict you will certainly throw you into a spiral.
Unpaid taxes will result into penalties, interest charges on the penalties and eventually a knock on the door from the exchequer. Trust me, you don’t want this experience.
It is therefore wise to allocate your cash flow to the best of your financial advantage. Do not overstock on inventory hoping to sell more yet experience suggests otherwise. Don’t buy assets that won’t be efficiently utilized. Avoid unnecessary expenses; entertainment, director’s lunch etc. when the taps start running dry, you’ll end up reminiscing on the good old days.
Confront and Handle Debt:
This goes both ways, your payables and receivables. Some entrepreneurs are afraid of following up clients with long outstanding debt. This is because they are afraid of ruining the relationship. Consistent calls and emails or even taking up services of a debt collector puts you in an awkward position. However, in order to sustain your working capital and other cash flow needs, it is prudent to continuously follow up on outstanding payables. Trust me, the AEP program delves much deeper into improving collection while maintaining harmony with your clients; 3rd reason why you should consider applying for the next intake.
When it comes to payables, we need to flip the coin. Why rush paying your suppliers if you can delay payment as much as possible while planning your finances? The best approach is to: have a pool of suppliers that you can juggle through, negotiate for better payment terms which match the flow of cash in and out. In case you are in a tight spot, talk to your suppliers about giving you a payment plan. It assures them that your committed to paying and gives them confidence in your business.
A good approach is to match you payable and receivable days. Have your clients pay you when your suppliers expect to be paid. However, the best approach to take is to have your clients pre-pay for different goods and services while at the same time negotiate for payment periods to suppliers of 30 days or more. If you can achieve this then you’ll be able to have an ample time planning and reorganizing your finances way before your invoices are due.
Never Forget Depreciation
This is more of a long-term consideration. Think about 20 computers each costing KES 100K. In standard practice, a computer’s useful life is at most 3 years, but you can manage to squeeze 5 years out of good models. On the 4th year, with improvements in technology and software your collection will start giving in. Some will take eons to boot up while others will just tap out. This will eventually slow down productivity within your company.
Ignoring depreciation means that during year 5, you will have a mandatory investment of roughly KES 2.5M that you expected but didn’t budget or allocate cash towards. Budgeting and appropriating funds for huge anticipated financial outlays will simplify your work in the long run.
Get Paid Well for What You do:
Do not indulge in price wars. It eventually hurts your business more than any perceived benefits. Additionally, it is better to turn away clients who are not ready to meet your price rather than take up projects that end up being unprofitable.
Most entrepreneurs tend to offer relatively low prices while hoping to maintain the loyalty of some clients. In the short run, this may work but with time, this strategy will reduce your profitability and eventually your cash flow. Do not be afraid to ask for what you believe your goods/services are worth. Curving out a niche for your business will help you attract the right client for your products/services.
There are many possible ways of improving cash flow management in your business. During the Covid-19 pandemic, most businesses have been forced to go back to the drawing board as they were caught unawares. Cash flow management is not easy, especially with growing businesses. The likes of Tuskys & Nakumatt grew too fast and were eventually unable to meet their working capital needs.
On Friday 30th April, we shall have an open session themed: “Taking Control of your Business Cash Flow”. This is one of our entrepreneur webinar series that our AEP Alumni & growth-oriented entrepreneurs get to enjoy. Take a chance today. Register below for the webinar & get more expert insight on how to improve cash flow management in your business.
