THE experience of old Mother Hubbard who was, in 1805, unable to feed her dog (at least insofar as the first verse of the nursery rhyme is concerned) seems to repeat itself in modern day small business, as small-business owners cry that their greatest business challenges are “cash flow” and the “inability to access capital”.
There is no doubt that proper and regular financial management is crucial to the success of entrepreneurs, and even though this management can be contracted out to qualified professionals, it’s imperative for entrepreneurs to have a basic knowledge of proper pricing, money management and cash collection procedures.
The correct application of financial principles and understanding the causes of cash flow challenges go a long way to ensure business success.
Throwing more capital at cash flow challenges is not always the solution. What is the point of continuously treating a symptom and not the cause?
Consider the following common causes of a lack of cash flow before resorting to a loan application for (more) working capital:
1. Lack of sales. Is this reason for insufficient income caused by a lack of sales training, outdated products, lack of stock, or lack of marketing or sales activity management?
2. Incorrect pricing of product or services. Using competitor pricing without a proper analysis of your own particular costings can lead to selling prices that are inadequate for business survival.
3. Inefficient collection of monies due. Entrepreneurs are notorious for not getting invoices into the hands of their clients timeously. This inefficiency is further compounded by not following up clients for money that’s due by them.
4. Incorrect usage of available cash flow. Money collected is used inappropriately (caused by, for example, a lack of financial knowledge, lack of available financing). So, for instance, we find monthly cash flow used to purchase capital items such as vehicles and which should, in a perfect world, be financed over a longer period, ie 48 to 60 months.
In this category we would also find many incidents where business owners abuse the cash flow of their business by using business funds to pay for private luxuries, or fail to retain some of the available surplus funds as a cash reserve in times of feast, while aware that times of famine are inevitable in any normal business cycle.
Entrepreneurs can substantially improve their chances of success by doing the following:
- Prepare a realistic monthly sales budget for at least 12 months and calculate, not only the number of monthly sales required to meet the budget, but also how much of the expected sales is anticipated to actually generate cash in the bank each month.
It is of vital importance that selling prices or hourly rates are appropriately and correctly calculated with regard to the specific financial needs and requirements of each business (the gross profit must be enough to provide for the payment of operating expenses).
- Prepare invoices properly and accurately (if appropriate, request deposits from clients) and ensure that invoices are delivered as soon as services have been rendered or goods delivered. It’s extremely important to remind clients courteously on the due date about outstanding amounts that are payable.
- If surplus cash is available once all expenses are paid, a portion of the surplus should be retained in a bank or other suitable investment account for use when expenses exceed cash inflows.
Finally, the well-known maxim of “turnover is vanity, profit is sanity but cash flow is reality” should be uppermost in any business owner’s list of financial priorities.
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*Thayn Niemand is a director of GC Grow.
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