Did you know that globally, the leading reason for small business failure relates to cashflow? The quarterly SME Confidence Index, conducted by Business Partners Limited, continuously underscores this statement within the local context. Year after year, respondents to the survey report that cashflow issues can be crippling and that maintaining the delicate balance between income and expenses is a make-or-break factor in business.
Why you should care about cashflow
Understanding the day-to-day financial position of your business will help you make informed decisions. These include: when to expand or even diversify your business, how to do it, whether to invest in additional resources and how to operate more cost-effectively.
As a small business owner, it’s also crucial that you have a full view of how you are spending money. Too often, business owners are revenue-minded and pay little attention to how their money is being spent. However, maintaining optimal cashflow depends on finding ways to make more money while also finding ways to spend less money.
Making sure that both these factors are being considered at all times requires some due diligence, regular finance check-ins and a good amount of vigilance.
Below are four steps to working towards better cashflow management:
1. Negotiate with suppliers
The first thing you need to remember about costs is that everything is negotiable. Your suppliers could also be small business owners, and it is likely that it will be in their best interests to build the relationships that will encourage repeat business. Once you have built up a track record of regular, on-time payments, you will have the leverage you need to negotiate better, more flexible payment terms.
If your supplier isn’t able to offer you lower costs, you could negotiate on other aspects. Explore the possibility of longer payment terms, discounts on early payments and larger quantities or a loyalty system that will grant you benefits that you can cash in at a later stage.
2. Implement a collections policy
Before initiating any relations or interchanges with your customers, you should have a clear and documented collections policy in place. This should include your policy on when payment becomes due after an invoice is issued, how you will follow up on outstanding payments and any penalties that apply to late payments. It should also include any rewards that apply to early payments and how you will manage bad debts.
Once you have a clear outline of what these terms are, be sure to include them on every invoice and in your contractual agreements, so all parties are fully aware of how payment will be dealt with upfront.
3. Build a prudent reserve
Financial experts always stress the importance of building up an emergency fund as a way of mitigating the risk of unexpected expenses. The same should apply to how you manage the cashflow of your business.
At a minimum, you should aim to build an amount that totals at least two months of the cost of your team’s salaries. This will provide a buffer against sudden business interruption factors. In tandem with taking out insurance to cover you against factors that could disrupt your operations, building a prudent reserve is an effective way of managing risk.
4. Create a debt repayment schedule
As a business owner, you will most likely accrue debt in various forms, whether that be on a company vehicle, a company premises, a small business loan or equipment bought on credit. With the increasing interest rates and to avoid debt from piling up, you need to remain vigilant and maintain a healthy debt-to-income ratio.
As a good cashflow management principle, your business should have a debt repayment schedule that lists all outstanding debts, the applicable interest rates and how each debt will be paid off. This should be coupled with goals on when to pay those balances in full. Keep this schedule fresh in your mind and reference it regularly to make sure that you’re on track.
Ben Beirman is the managing director of Business Partners.
BUSINESS REPORT