Share

How to avoid the cash flow crunch

Cape Town – A cash flow crunch often occurs in small businesses trying to balance cash coming in with cash going out of their enterprises.

The consequences of getting this balance wrong can mean no salary for the business owner until the crisis is resolved or, more seriously, a significant loss of business that could threaten the very existence of the small enterprise.

What most entrepreneurs don’t realise, says Ravi Govender, Head of Small Enterprises at Standard Bank, is that poor cash flow management can begin with the habits, mindsets and behaviour of the business owners themselves. “The reality is that without a positive cash flow and having money to meet expenses, no business can reach its full potential.”

A cash gap often occurs, Govender says, when stock is bought and payment is required in 30 to 60 days. You still need to mark up the stock and put it on your shelves before you can sell it. The problem arises when it takes longer to sell the item than anticipated. The supplier must be paid, but in many instances the customer still has 30 days to pay you.

Business coach Greg Mason gives tips.

Watch:



Back to Basics

Begin by reviewing your business plan and budgets and identifying where cash flow problems are occurring so that the situation can be reversed is needed. Most often, this means reducing expenses.

Then, focus on what is essential for the business to grow and what can be dispensed with, by assessing your inventory and removing items that are not good sellers.  You could also consider:
.Promoting old and obsolete stock to free up cash.
.Marking down goods and selling on a cash on delivery (COD) basis only.
.Streamlining operations so stock arrives ‘just in time’ to be used. This prevents costly stock build-up.

Stocking up on the items that sell quickest is your next best step.

Once you’ve started saving, use that money to reduce debt. Maximise the benefit by concentrating on paying off things that have the highest interest rates, and paying cash when you can and reducing the number of credit lines you have.

If things are really tough, look at down-sizing the business. Instead of retrenching staff, you could offer them flexi-time packages or part-time employment. You could also ask regular customers when, and how many products they will require. You would need to adapt your buying accordingly.

Manage your relationships with suppliers

Managing your relationships with suppliers correctly will assist cash flow.  Start by re-negotiating and extending payment terms. Then, collect your income first and pay your suppliers later. See if there is preferential pricing for buying bulk and, if so, consider forming buying groups.

Look for new suppliers who offer cheaper pricing. Unless there is a benefit from using one central supplier, shop around for several suppliers. Request discounts and extra discounts for early payments.

How is money coming into your business

Try operating on a COD or pre-payment basis, which will immediately decrease your debtors list. Thoroughly vet companies or people applying for credit before you extend credit to them. Extend credit only for orders that exceed a minimum order size. Added to that, ask for deposits and change your payment terms from 30 days to 14 or even seven.

If you provide a service, ask for progress payments if work is going to take place over an extended period of time. Then, penalise slow payers by charging interest and refuse to supply customers who consistently wait several months before paying you.

Review your selling process

Look for ways of increasing sales by offering COD specials, offering good payers a discount for early payments and reducing delivery costs by only delivering orders that exceed a set minimum limit.

“If after these reviews you still need a cash injection, you could consider applying for a bank loan,” says Govender. “Your chances will improve if your company has a good credit record, if there are good financial records available, and if the cash flow problem is temporary.

“If a banker sees that you understand your business thoroughly, are in control of finances and have a plan for moving forward, the chances of successfully getting financial assistance are far greater than they would be otherwise,” says Govender.

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
19.01
-0.4%
Rand - Pound
24.16
-0.2%
Rand - Euro
20.66
-0.3%
Rand - Aus dollar
12.39
+0.3%
Rand - Yen
0.13
+0.5%
Platinum
906.17
-1.9%
Palladium
1,006.16
0.0%
Gold
2,156.08
-0.2%
Silver
24.93
-0.5%
Brent Crude
86.89
+1.8%
Top 40
66,252
0.0%
All Share
72,431
0.0%
Resource 10
53,317
0.0%
Industrial 25
100,473
0.0%
Financial 15
16,622
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders