As a start-up business, chances are your cash flow is tight and you haven’t managed to secure financing. Don’t worry, you’re not alone. In fact, these are the biggest challenges most start-ups face: how do I manage my cash flow and get customers to pay on time? And how do I access funding?
The reality is that most banks will not lend to a start-up within its first three years — the risk is simply too high. This is hardly unique to South Africa, but rather a global phenomenon. That said, Clive Pintusewitz, director: small enterprise and enterprise development at Standard Bank, admits that there is more that banks can do to assist the start-up market.
“It’s a delicate balance,” he says. “On the one hand, many start-ups simply do not have the financial acumen to manage their finances well enough to mitigate the risk banks take lending them money. On the other hand, I firmly believe there is more that we can do to facilitate lending to start-ups and SMEs.”
In order to close this gap however, it is essential for start-ups to improve their financial management skills. Forecasting and cash flow are essential. If a business owner can prove their model will work, and show they have an intimate knowledge and understanding of their business and its finances, they immediately reduce the risk of lending them money.
Mitigating business risk
“Every business will have cash flow gaps in its first 12 months,” says Pintusewitz. “This is inevitable. However, it is possible to forecast where those gaps will be. If a business owner does that, the business loan is still risky, but it’s predictable. Often we are only approached after problems have manifested themselves, which is an immediate red flag for us. The fact that the gaps occurred isn’t the issue, but rather that the business owner did not have enough of a handle on events to predict the gap earlier and therefore make provision for it.” (See case study on page 69 for an example of cash flow forecasting).
Accurately forecasting cash flow issues is not only useful for securing finance however. Good business and financial management will ultimately lead to growth — whether or not the business secures finance.
Pintusewitz offers ten key areas that start-ups should focus on for healthy cash flow.
- Don’t spend ahead of revenue
”This sounds obvious but we see businesses doing all sorts of things. For example, start-ups often believe that they need to create a professional image, and so they take 200 metres of A-grade space in Sandton, get locked into a two year lease, and then aren’t able to pay their rent because the contracts haven’t flown in as expected. It’s a death knell for a start-up. Flexibility is vital.“
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- Get your revenue in and bank it
There is no substitute for this. Manage your debtors from the first contract you get. Make sure your clients pay you properly.
- It’s about control
“We always say retail is detail, but this is true of any business – you need to know exactly what is happening in your business: your stock; your staff; money in the bank and money owed you; who you owe; what you will gain by paying your suppliers at different times etc.”
- Understand your market
What are your risks? In other words, do you stock perishable goods? Is your business power hungry? What happens if the lights go out? Do you rely on trends? You need to know your market to manage your business properly.
- Check your finances regularly
How can you coincide when you are paid and when you pay? The closer you can get those two working together, the better off you will be, and the more positive your cash flow.
- Understand gross versus net profit. You get goods, you mark them up, but you don’t take all your own costs into account, and by the time you have taken everything into account, you are actually losing money.
- Don’t rely on a few big contracts
If one of those contracts doesn’t pay you on time, can you survive? It might be more prudent to turn down a big contract in favour of a few, less lucrative contracts. It might be a
R1 million opportunity, but what happens if they can’t pay? Perhaps you should rather only take R200 000 of the contract, and spread your risk across other smaller contracts. Very few entrepreneurs manage this well — they see the bright lights and go for it, without managing the risk.
- Do due diligence on potential clients
Don’t just take a business at face value. Investigate its credit record through a bureau like Experian or Transunion, and speak to other clients to find out what they are like to work with, and whether they pay on time. A bad client can kill a start-up.
- Don’t overtrade
Many start-ups grow faster than their cash flow can support. Your profit is going up, but profitability is going down because your expenses are higher than revenue. Before you make the decision to invest in growth make sure the resultant revenue is greater than the costs. If it isn’t, wait.
- Make sure you see the full picture
You do need to grow, but understand how the growth will affect you — and then you will be able to grow at the appropriate times. Don’t assume that the revenue generated from growth will cover the additional costs.
It’s important to understand risks and make educated decisions. Cash flow is vital to a start-up’s survival, and healthy cash flow can only be achieved through an intimate understanding of your business and your market. n
Positive Cash Flow
Pizzaz is a small owner-run events management company. The company enjoys relatively steady business throughout the year, although November and December are busy months, and January is quiet. On average, they collect 50% of their revenue in the month of the event, 30% the month after, and the balance two months after the event.
Revenue in September was R120 000, October R110 000, November R150 000, December R250 000 and January R50 000.
The cost of materials and décor for events is 40% of the amount charged and paid on the day of each event, monthly rent costs R5 000, cell phone bills R3 800, and salaries R85 000. 10% bonuses are paid in December.
Because January is such a quiet month, the owners use the time to upskill their employees and send them on training courses. This is projected to cost R15 000.
Here is a brief example of their cash flow projections in the months November through January. They had R25 000 in the bank at the beginning of November.*
By the end of January, Pizzaz’s cash flow is in the negative. With adequate planning and risk management, the situation can be controlled and planned for.
Standard Bank launched BizLaunch in April. Through this innovative new product, the bank is extending a strong hand of support to start-up businesses with a package that will help ensure the correct basics are in place from the word go, reducing the potential rate of failure.
BizLaunch offers the critical things businesses need to get started:
- A R90 per month (R3 per day) business account, which allows holders unlimited electronic transactions, unlimited debit orders, unlimited cheque card swipes, Internet banking, My Updates (SMS notifications); and eight ATM cash withdrawals. This excludes branch transactions.
- My Business Online, an accounting package from Pastel, the market leader in accounting software.
- Businesses have access to a Business Banker to discuss and meet their needs.
- Free packaged business support and tips on how to start and grow a business.
Why we love it
As a one-stop shop, full-service offering that includes a very affordable business account with no hidden costs; an accounting solution; an affordable insurance offer, and access to expert advice and other support, BizLaunch is a proactive product that assists start-ups to lay the right foundations for business success. The tool aims to give entrepreneurs a sense of the financial position of their business.
While the bank acknowledges that there are no silver bullets when it comes to starting a business, but that it takes hard work and persistence to succeed, Bizlaunch offers relevant practical solutions.
Go to bizconnect.standardbank.co.za for more information.