Cash flow management key for SME-owners
13 July 2018 | People
There is no greater joy than owning your own business. It allows you to work according to your own rules since you are probably doing something that you love. Thus, you are creating, investing and building something that is so much more than a job or a monthly salary.
However, being a small business owner does come with a whole heap of challenges and risks. One of the major challenges is managing your cash flow. This means managing your incoming and outgoing cash.
Whatever product or service you sell in your business, you expect payment from your customers at some point. If you manufacture goods, you need to buy the raw material and machinery while leaving enough to pay rent, staff salaries and your own. The list of expenses goes on.
As a business owner, you need to find ways to mitigate the risk of your customers not paying. If you own a shop, the payment terms may be as simple as handing over the goods as soon as the customer hands over the cash or swipes for payment. However, with services and other types of Small and Medium Enterprise’s (SMEs), there are more complex payment terms.
Payment terms vary, from payment upon receipt of goods to payment within 30, 60, 90 or 120 days. The larger the organisation, the longer they usually wait to pay you. This can cause severe cash flow constraint for SMEs. If clients do not pay within the allotted time, the entrepreneur will not have money to pay her/his; suppliers, rent, salaries and other business expenses. This may have far-reaching consequences for the entrepreneur and their business.
Often the SME will have to take out new loans at less favourable rates due to their credit ratings or in a worst case scenario may lead to bankruptcy.
For this reason, SME-owners need their clients and customers to pay their invoices within the payment terms as this allows the business to be self-sustainable in the long run.
What can small businesses do to better manage their cash flows?
1. Monitor your business cash flow regularly and forecast monthly cash inflows (either from sales or services rendered) and cash outflows (salaries, rent, etc.). This allows you to reasonably predict future cash flow challenges.
2. Budget. Come up with a spending plan for your larger expenses;
- How much you expect to spend?
3. Enforce payment disciplines by:
- Asking for a deposit or partial payment on your products or services. So even if your customers delay in paying you, your cash flow is not completely depleted.
- Take steps to shorten the period your debtors have to pay you such as by offering a small discount.
- Communicate clearly your late payment terms and be more effective in collecting outstanding revenue
- Negotiate for better payment days with your creditors (If possible)
Knowing and monitoring you business’ cash flow position will also enable you to make decision such as when is a good time to approach the Bank Windhoek for assistance. Sometime this is the only option available; so it is best to advise that small businesses should get to know their banker and ensure that their financial records are always in order.