Considering the common notion that a majority of small businesses fail due to cash flow problems, this subject has never been more topical today, as South African SMEs grapple with the ongoing effects of COVID-19.
Cash flow management is simply the discipline of managing the money coming in and out of your business to avoid liquidity shortfalls.
Some of the benefits of getting cash flow management right include:
- Creation of a cash buffer to allow the business to withstand stormy periods and to restock/reopen after an unexpected or prolonged business interruption (e.g. a recovering from a fire)
- Keeping some powder dry to take advantage of new opportunities to pivot, or to fund acquisitions
- Reducing the risk that the business owner may have to dip into his/her own personal finances to prop up business cash flow
- Managing costs (plugging any unnecessary leakages at the bottom of the business’ profit bucket)
- Tracking consumption expenditure (money spent on goods and services that meet an immediate need, but that does not generate any future returns) vs investment expenditure (money spent on assets that are expected to increase in value over time)
- Avoiding a situation where the business is forced to accept sub-optimal funding options due to desperate circumstances
Solid cash flow management can make a big difference on how the business will emerge post-COVID-19. Whether your business is a micro enterprise that is just starting up or a large corporation, the core principles of managing cash flows are the same.
- Firstly, it’s important to take stock of the business’ opening cash position, to get a firm grip on the starting point. This includes physical cash, money in the bank (including any available limit on credit facilities) and any cash equivalents (assets that could be solid quickly to convert into cash).
- Next, the business needs to identify where they are not being efficient in the management of operating cash flow, for example slow collection on invoices or retaining inventory which could be returned to suppliers. A review of fixed costs like rent is also important, especially since COVID has taught us how physical interactions (which need premises) could be moved to digital/online platforms.
- Undertake a review of cash flow from investing activities – which is cash generated from the sale of assets (such as property) less the cash paid for things like new equipment. A fair question to ask is whether your business does really need to own its own expensive machinery – could you delay new machinery purchases or buy second hand instead of new?
- Finally, reflecting on cash flow from investing activities to establish if it makes sense to raise more debt or equity funding; although this should always be undertaken affordably and at an appropriate cost of capital. In addition, during tougher times many businesses take the prudent step of ceasing payments of dividends to shareholders, choosing rather to retain the cash in the business – where it is needed most.
The business can operate in a booming industry and have great revenue generating potential; however, these prospects can easily be derailed by poor cash flow management practices. It is important for every business owner to understand their cash position and take an active part in making decisions to protect and grow it, especially in times of crisis.
By Andiswa Bata, FNB Business Regional Head – Gauteng South West