Cashflow is king

2012-05-08 00:00

UNDERSTANDING how your cash flow works and managing it could be the difference between success and failure in the business world.

Experts stress that it is more than just one’s bank account that counts, adding that cash flow should be an important focus area all year round.

Christo Botes, spokesperson for the Sanlam / Business Partners Entrepreneur of the Year® competition told The Witness that it starts with understanding all the key elements. They include assets — stock (not yet sold); cash (in the bank); debtors — as well as liabilities, such as creditors and operational costs (salaries, various expenses, etc).

“There is an inter-relationship between all these elements,” Botes stressed.

He added that managing stock is often an area in which businesses get things wrong. He said it is vital that owners and managers anticipate well in advance the level of stock they require, particularly when it comes to peak seasons like the Christmas festive season.

“There are times when you know you will need extra stock. October and November are usually the months when you build up stock in anticipation of this. It is vital that you negotiate with your suppliers in advance to have your credit lines increased. You could also have an arrangement with a supplier that they give higher-value items on consignment, so that you pay once it is sold. It’s not always possible, but it can be arranged. Your shop floor then becomes a display floor for the supplier.”

Botes, who is an executive director at Business Partners, stressed that owners and managers make the cash in the bank “work for them”.

He said this should be monitored on a daily basis, adding that ensuring that your overdraft balance is as low as possible will save money on interest payments.

“There are different times of the month that you need cash, for example for salaries, rent and municipal bills, and you need to plan for this accordingly.”

The importance of managing debtors cannot be underestimated.

“Your debtors must pay on time,” he said. “Keep in touch with your debtors.”

It is crucial that you establish formal payment terms with your debtors.

“You should credit vet them. If they are not in good standing, then they must pay in cash.”

Botes also advised that owners and managers spread their risk among their debtors. He said you could arrange settlement discounts, as this will incentivise payments while improving your cash-flow.

“Planning is vital, especially when it comes to timing payments and receiving money.”

You should always endeavour to maintain a good relationship with creditors, based on trust and honesty.

“Your word must be your honour with all your creditors and bankers.”

Botes advised that formal agreements be set up regarding the line of credit.

“An informal agreement could land you in trouble if the supplier does not recognise this. Your supplier could stop supplying and then you would have major problems. Pay on time, stick to your limit or adjust the limit formally.”

He added that servicing various expenses, including loan instalments for vehicle and equipment finance, should not be forgotten.

Botes reminded business owners that owners and managers need to be aware of the various tax deadlines, especially when it comes to payment deadlines.

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