Good cash management can rescue a business
If your cash flow is currently under pressure, it does not mean that your business is bankrupt.
Nowadays it usually means that it only takes much longer to recover the money that people owe you, than it takes to pay your own debt. This is one of the consequences of the recession. Everyone is in the same boat and is struggling to balance their cash-flow budget – ordinary people as well as shops and the government.
Small businesses can manage their cash flow better in the following ways:
* Give special attention to the management and control of debtors. Remember, in a recession everyone’s cash flow is poor, and people and undertakings owing you money are going to try to “stretch” payment as long as possible.
* Therefore, regularly check your debtor analysis and try to actively manage the outstanding debtors, especially those who exceed their credit terms, and collect their debt.
* Try to send the invoices for goods or services to clients as soon as possible after completion of the transaction.
* Set a deposit policy, especially for big orders that require a lot of work to be done or raw materials to be obtained beforehand.
* In exceptional cases a discount can be offered to debtors who pay their account quickly. Just make sure that the discount calculated on an annual basis is not more expensive than, for example, the interest that you have to pay on an overdraft.
* Think carefully before you accept new contracts. They could be putting more pressure on the cash flow of the business. Many businesses have failed because they could not say no to a transaction that was definitely profitable, but whose cash income was received completely too late.
* Try to keep the stock in the business at an optimum level. Take note of stock that sells slowly, and remind yourself that the stock lying on the shelves is actually cash lying there.
* The payment of suppliers must also be analysed continuously, just like the discount to debtors, in order to determine whether discount for quick payment will mean better utilisation of the cash flow.
* Handle capital purchases very carefully. Delay those purchases, if possible. It is also not always necessary to buy new items. Office equipment in particular can be bought at auctions or through classifieds.
* Pay careful attention to the payment of operating costs. Remember, the small things can make your business go under. Also, get new quotations for items such as short-term insurance, medical aids, printing and stationery, repairs and advertising costs on a regular basis.
* Sole proprietors must be particularly careful not to simply draw cash from the petty cash when it is needed. If one adds up all the small amounts, you are generally shocked to see how quickly they accumulate to a huge amount in the long run.
Whether your business is a general dealer in a suburb, or the vet in the country, or the business school of a university – everyone experiences the effect of economic pressure and therefore cash flow must be managed cleverly and efficiently.
* Prof. Tommy du Plessis is the director of the Potchefstroom Business School at the North-West University, which incorporates the Small Business Advisory Bureau (SBAB).