How to manage your cash flow

2012-04-14 13:36

James is an estate agent who focuses on both commercial and residential property leasing and sales.

He recently moved from Durban and started his own agency in the northern suburbs of Johannesburg
“I have a challenging situation. I have no cash flow and, as a result, my business is under pressure.

“I am struggling to raise capital to inject into the marketing of my business, and I am not able to grow and employ staff,” says James.

Thabo has a small business in Naturena called Cape Cookies, which buys biscuits to repackage and sell. Although he has been running the business since 2008, he is struggling to grow it into a sustainable entity.

“I sometimes have to spend family money to pay the suppliers, and I am also using the business money for transport and to buy food during the month, and sometimes to pay the school fees,” says Thabo.

“I understand that I have an administration problem, but how do I fix this? I want to move forward in order to grow my project because I have a vision and am passionate about it.”

Riana Grobler from Old Mutual says both of these readers have a similar problem to many small business owners – not keeping their personal and business finances separate.

“They are using money from the business for household use and this has a direct implication on their cash flow,” says Grobler.

Grobler says if you are going to run a business, you need to have a proper budget in place and have separate accounts. Money that is earned by the business must be reinvested in the business.

Understanding breakeven point

The starting point is to do a proper business plan so that you understand your breakeven point.

“A breakeven point is how much money you need to make in your business in order to cover your business expenses. Neither James nor Thabo had any idea how much money they had to make in order for their business to be profitable,” says Grobler.

In order to calculate a breakeven point, you have to include all the costs associated with the business, including electricity, transport, telephone and office rental (see Thabo’s budget).

In a breakeven analysis, you also need to include a basic salary for yourself. If your business cannot pay for you to put food on the plate, then you are not going to survive. It is very important that this salary is the only money that you take out of the business. Do not be tempted to dip into the business funds if you have a shortfall one month. This will be to the business’s detriment.

Your business plan will also need to factor in cash flow constraints. For example, with an estate agent it may take up to three months for commission to be paid after a sale. James needs to have funds available to support him or another income stream.

“Both James and Thabo believed that they needed to put more money into their business for marketing, but that was not the problem; cash flow and budgeting was the problem,” says Grobler who has advised and met many small business owners.

“Many businesses have stunning ideas and a real passion to make it work, but the success all comes back to basic finances.”

Thabo’s budget

The purpose of a budget is to know what your expenses are and what your income is, so you can determine whether you are running a profitable business.

Total revenue (sales):
You need to make a list of the different cookies you are selling and at what price you are selling them for.

Total cost of sales: Make a list of what those cookies cost at the price you are buying them for.

Gross profit: This is the difference between your total revenue and total cost.

Total expenses: Make a list of all your expenses with regard to the business. This may include:

» Salary expenses: The amount you are paying yourself from the business;
» Delivery costs: What it costs you to deliver the cookies to clients;
» Telephone: Calls made that the business must pay for;
» Supplies: Paper and pens for the office; and
» Travel expenses: Travel to visit clients or to do marketing for the business.

NB: The expenses are fixed expenses, which you will have every month to enable you to run the business.

Net profit: This is the amount you have left once you have deducted your total expenses from your gross profit.

If your net profit is a minus figure, it means that you are not making a profit from the business and that you have a serious cash flow problem.

There are ways to rectify this and turn your business around to one that makes a profit. In order to do so, you need to keep track of everything you spend. Remember to keep your business finances and your personal finances separate. Then determine which of your expenses should be cut to the bone or eliminated to enable you to show a profit.

The number of cookies you sell and your selling price are very important. You need to ensure that you don’t sell too little or at a too low price, or else you will not be able to cover your expenses and therefore will not show
a profit.

You should determine what the selling price of the cookies must be in order to cover your expenses. You need to keep your net profit in the business and not spend the money in your personal capacity, as you need this to be able to continue with the business and buy stock (cookies) to resell.

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