Cash is to a business what oxygen is to a body – it simply cannot survive without it. Nothing is as important to the financial health of a growing small business as reliable access to the required level of cash. If the cash dries up, the business will not be able to operate.
According to Vincent Kiyingi, Country Manager at Business Partners International, it is for this reason that every small business owner must have a detailed plan to ensure survival. Kiyingi shares some tips to assist entrepreneurs with their cash flow planning.
- Underestimate sales and overestimate expenses
Entrepreneurs are often optimistic by nature and tend to rely on late sales and underestimate expenses rather than delivering a realistic picture. Instead, predictions should be based on the historical figures and trends, with rather conservative sales increases taking seasonality into account. With a new venture, use only the most likely, tangible sales that you will be able to make rather than an abstract market-share calculation.
- Be frugal
Cut out all nice-to-haves from your overheads as well as any avoidable capital acquisitions. Check your expenses regularly. However, be careful not to cut too deeply, especially when it comes to marketing expenses as this can be an indispensable investment for future sales.
- Set a target
Develop and quantify the minimum cash reserves needed as a safety net in your business. Often it amounts to enough cash to cover the expenses of running the business for at least three months. Once these reserves are in place, it becomes easier to plan for and fund expansions or capital investments.
- Avoid unnecessary debt
It is actually easier to acquire finance for a small business than what is generally thought and the hard part of business finance is paying it back. Therefore, debt should only be used as part of a carefully managed financial plan. Try to match the term of the debt to the lifespan of the asset that you’re buying.
- Have a strong credit policy
When you do sell on credit, be absolutely clear about the credit terms. Many entrepreneurs are often involved on the sales side of the business and feel uncomfortable getting involved in chasing up overdue invoices. However, it is imperative that clear credit terms are implemented from the start and that clients stick to them. A friendly but firm staff member can be tasked to chase up the unpaid invoices.
- Work on your creditors
Negotiate longer terms with your creditors than what you have with your debtors. The key to good creditor terms is trust built up over years of prompt payments and good communication.
- Free up the cash in your unsold stock
Putting slow moving stock on sale not only returns cash to your business, but gives you an opportunity to create some excitement and draw in new customers.
- Liquidate your white elephants
Selling unused assets cluttering up your work space can give your business a welcome cash-flow boost.
- Don’t burry your head in the sand
When you experience a cash crunch, the worst thing you can do is to stick your head in the sand. Rather be open and upfront about your situation. Small, incremental payments show your creditors that you are still around and in business. Even if your account is overdue, negotiate cash purchases with the same supplier rather than jumping to a new one.
“When cash dries up in your business, production falters, clients are let down and you lose business fast. It also puts immense emotional strain on the entrepreneur that needs to be taken into account as it spills over into the workplace morale. As always, a sober plan to get out of a crisis might save your business however the best option by far, is never to get into a cash-flow crisis in the first place,” says Kiyingi.