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Seduction by cash

Sep 22 2010 17:27
Marc Ashton
Johannesburg - It's a generally accepted conundrum for companies of all ilks and sizes that managing capital in a business up-cycle is the acid test of an entrepreneur's judgement.
"South African businesses are starting to realise the value of actively investing their excess cash rather than leaving it idle in a current account," says David McCall, head of investment management at Nedbank's business banking unit.
South African business owners have traditionally held surplus funds in current accounts that attracted little or no interest, says McCall. They would draw on it when they needed new equipment, excess stock or to pay dividend payments. For this reason the bank has developed a number of investment products for businesses to consider.
However, McCall says that investing cash needs careful planning. That's because spending cash is a short-term activity and anyway, entrepreneurs tend to be thrifty rather than expansive. They're just less experienced at spending than saving.
This view is shared by Pavlo Phitidis of business accelerator Aurik who warns readers that small business owners are often seduced into long-term fixed deposits.
There's a recent example where one of the businesses Aurik assisted had to suddenly draw cash for a short-term. As a result, the penalties for withdrawing funds from the company's fixed deposit account rubbed out the benefits of saving.
Asked when a company knew it had "too much" cash, Phitidis said that business owners must separate their current from their "reserve" bank accounts. 
Before 2008, this could have been around one or two months in business overheads. However this has now increased to around four months for businesses if they want to be on the safe side.
"Anything more than that can be considered for longer-term fixed deposit instruments," says Phitidis.
A look at the fixed deposit rates on offer over a 12-month period shows that Sasfin Bank at 6.6%, followed by Bidvest Bank at 6.4% and Grindrod Bank at 6.3% for investors who deposit an amount of between R50 000 and R100 000. 
Capitec Bank offers a rate of 7.43% but does not take business deposits.
Cathie Vanmari, business development manager at funder, GroFin, reminds small business owners that they should not forget about regulatory payments such as Value Added Tax (Vat) when they do their cash flow projections.
"A business runs on cash and those who have more than sufficient are more likely to be successful," she said.
She adds that if small businesses find they are consistently building up excess cash they should look for ways to deploy some of this to additional marketing, settling of long-term debt or upgrading equipment.
Vanmari's colleague Philip Viljoen who is responsible for business development at GroFin suggests that businesses look to buy stock early at discounted rates if the opportuntiy presents itself.
Adrian Bain, an independant small business mentor agrees with Phitidis saying that small businesses need to be more conservative with their cash than they were a few years back, especially with funders being reluctant to extend credit to vulnerable small businesses.
"For me a big thing is where the business is in its growth cycle and where the entrepreneur wants to take it," he told
He points out that if the entrepreneur is simply using the business to fund their lifestyle but does not have plans to grow much bigger, then they are justified in holding less cash.

However if the end goal is to build a sizeable business, then the cash needs to be reinvested in the business. This could include investments in staff, stock, infrastructure and equipment.
Bain felt that six months worth of cash to cover overheads for a small business was a sufficient cushion.
One of the issues identified by small business experts who spoke to was the inability of managers to produce and manage a basic cash flow statement.
A cash flow statement is a view to how operating cash will move in and out of the business over the next few months.

One of the areas where small business owners come unstuck is they see a natural relationship between invoicing and cash coming into the business.

This does not take into account the fact that debtors may not pay timeously or that invoicing and cash management is not being handled correctly.
This includes understanding your own business cycle and whether you have any quiet periods. For example, a retail business may be very busy in December but will be quieter in February. Similarly other businesses may find their clients shutting down during the festive season and not spending.
Small business guru Allon Raiz from Raizcorp comments that often business owners who have bootstrapped their company off their own financial resources, have a better "feel" for the cash movements in and out of their business.

"When you bootstrap your business, you reveal the weaknesses in it. There is no room for "make-believe" in businesses with very little cash-flow he says."
capital  |  entrepreneurship


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