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Financial Management

Can suppliers help my cash flow problem?

Suppliers can be of assistance, but first establish why you’re having a cash flow problem.

Steven Delport

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How can my suppliers assist if I have a cash flow problem?

Suppliers can help improve your cash flow by supplying you with goods on credit. This helps by allowing you to buy goods and only pay for them at a later date.

In a best case scenario, you will be able to sell these goods and be paid for the goods you sold, before you have to pay your supplier, but more about this later.

While credit from suppliers can help cash flow, it is important to identify the actual cause of the cash flow problem so that corrective action can be taken. Possible causes of cash flow problems can include one or more of the following:

  • Insufficient capital – capital consists of funds raised from shareholders and loans. A business needs sufficient capital to fund fixed assets and working capital (stock, debtors and creditors).
  • Growing too quickly – a business which grows too quickly can often not have sufficient capital to fund the growth.
  • An unprofitable business – does not make sufficient profit from the sale of its products to cover its fixed costs (rent, electricity, salaries etc). The net result is that the business is unprofitable and will run into cash flow problems.
  • Poor working capital management – working capital consists of stock, debtors and creditors. If a business holds too much inventory, grants excessive credit thus incurring bad debts and does not receive payment from its debtors on time, it will soon run into cash flow problems.

Good working capital management is critical to a business. The objective of working capital management is to reduce the cash cycle.

cash cycle diagram_Financial Management_Ask Entrepreneur

Reducing the cash cycle is achieved by:

  • Reducing inventory/ stock days – reducing the time between buying and selling inventory.
  • Reducing receivables/ debtor days – reducing the time between selling inventory and receiving payment for the sale.
  • Extending payables/ creditor days – extending the time between purchasing and paying for the purchased inventory.

operating cycle_Financial Management_Ask Entrepreneur

 

Payables management, extend payables by:

  • Negotiating better terms with your suppliers, and
  • Delaying payment without losing supplier goodwill or trade discounts.

At the same time, cash discounts are usually attractive and if possible, it is worth taking advantage of them.

Steven Delport is the founder of Integer Consulting Solutions (Pty) Ltd. Integer Consulting Solutions helps: • Improve business performance and strategic direction, • Understand finance and business acumen, and • Develop individual’s knowledge of self. This three pronged approach helps improve profitability and cash flow while integrating strategy, operations and finance. Steven holds both a MBA and a Certificate Programme in Leadership Coaching from Wits Business School. He has extensive business experience having worked in the banking and consulting industries for more than 20 years and works with a number of business schools in the areas of strategy, finance, leadership development and coaching. For more information, please visit www.integerconsultingsolutions.com and find him on Google+.

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Financial Management

What do I keep in mind for financial planning in a business?

In the startup phase of any new business, the profits will usually be quite low. It is therefore important to be wise with every cent in these early stages.

Peter Gossman

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When doing financial planning for the first few months of my new business, what sort of things should I bear in mind?

Below are some financial considerations for the first few months of your new business.

1. Your Personal Salary

In this startup phase, the owner’s personal salary and the business viability will be strongly related. If you are solely reliant on your business to meet your needs, then you may need to reduce your lifestyle to ensure that your business will still break-even, while paying you enough to meet your essential needs.

Related: 6 Steps Of Financial Planning

Don’t start your business hoping to draw a large salary. This may come later, but seldom in the startup phase. Initially, you may have to personally contribute money to the business just to keep it afloat. If possible, work and save up as much as you can before starting your business. The startup phase will often require personal sacrifice.

Consider working a second job in the early months of your business. Your goal in the startup phase should be to take as little as possible from the profits, so that your business can grow as quickly as possible.

Reduce your personal lifestyle and expenses as much as you can. Carefully develop a personal monthly budget. Monitor this budget regularly and ensure that you adhere to it.

2. Separate business finances from personal finances

It is important to have a very clear separation between business transactions and personal expenses. Some owners use business funds for personal costs, often using cash from business sales to buy personal items, then declaring these as business expenses.

Any money taken from business profits for personal use cannot be expended to the business, nor should personal transactions be done through your business accounts. Also avoid business trading using your personal bank account. The only personal cost through your business accounts should be the salary that is paid to you.

3. Startup capital

In most businesses, you will need to invest money, (for stock, machinery, equipment, etc.) before you can trade. When determining your required startup capital, it is wise to start small and gradually scale up.

Avoid debt as much as possible. Focus on sales and begin selling as soon as you can. You don’t need a fancy office with billboards and business cards to start trading. Avoid large rental costs – initially try to work from home. Should you need a loan, try to get low-interest loans from friends and family before approaching institutions.

4. Cash flow forecast for your business

Plan a cash flow forecast for at least 12 months. Take time to realistically list the anticipated monthly cash flowing into your business (Sales, Loans, Investments), and out from your business (Salaries, Suppliers, Loan repayments, Rent, etc.).  Regularly review this forecast.

5. Accurately record all income and expenditure – personal and business

In order to draw up a realistic Personal Budget and Business Cash Flow Forecast you will need accurate historical information of all your business and personal transactions for the previous months. Start today: record all income and expenditure, especially cash transactions that do not leave a document trail.

Remember to keep personal records separate from your business records. Develop an effective filing system for all source documents.

6. Don’t give up

Starting a new business is tough, and the financial rewards are seldom seen in the startup phase. You may be tempted many times to just give up. Remember, every large tree started as a small seed and took a long time to grow.

If you give your small “business seed” the care and attention it needs, it will eventually grow and develop into a great tree and bear much fruit.

Related: How to Become a Millionaire by Age 30

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Financial Management

How should I calculate if a project is worth it?

Our turnover is great, but our profits are not. How do I calculate if a project is worth it? We excited by the deal, but I think they end up costing us more than they’re worth.

Louw Barnardt

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How should I calculate if a project is worth it?

If you’re an entrepreneur without a strong financial background, one of the biggest business challenges you might face is the evaluation of a project’s financial implication. Often new projects are enthusiastically undertaken without proper consideration of the real profit the company stands to make.

A new project or contract always means more revenue, but often it does not end up being profitable in total.

If your business has been growing its revenue, but profit has been going sideways or down, your company is actually only spinning its wheels in terms of bottom line profit.

It might be time to implement a basic financial analysis before a project or contract is accepted.

Considering net present value

Before you roll out that new line of business or accept that project, take the time to consider its net present value. Sure, it generates income and keeps your team busy, but after prudently taking into account all costs and the effect of your cost of capital over time, is it still making you money?

The process to undertake can be broken down as follows:

  • First, understand your company’s cost of capital
  • Plot your project’s cash flows over its life span
  • Calculate the project’s net present value using your cost of capital.

Cost of capital

Cost of capital means the cost of the equity (the owners’ own money) and debt (borrowed funds) of the company. It is calculated as the cost of equity times the weighting of equity in the capital structure, plus the cost of debt times the weight of debt in the capital structure.

Cost of Capital = (cost of debt x weight of debt) + (cost of equity x weight of equity)

A basic example to simplify this mouth-full:

Financial decision making

Peter’s company is half-funded by himself, and half by a loan. The weight of equity is therefore 50%, and so is the weight of debt.

The interest on the borrowed funds is 12% per annum. Because the interest is tax deductible, we use the after tax cost of interest. The cost of debt is therefore 12% x 0.72 = 8.64%.

Peter’s expected return on the money that he put in is 30% to compensate for the risk that he is taking in putting money into his business.

Let’s keep it as simple as this for our example. Applying our formula, Peter’s cost of capital can be calculated as:

Cost of Capital = (cost of debt x weight of debt) + (cost of equity x weight of equity)

= (8.64%x50%) + (30%x50%)

= 19.32%

Peter now knows that his company will need to generate returns of at least 19.32% in order for him to adequately cover his cost of capital.

Plotting your project’s cash flows

Peter’s financial decision is whether or not to purchase a new line of software with a five year licence for his design company. The new software will enable a new stream of income, as well as add to existing income streams and will cost him R200 000. He has plotted the project income and expenses over five years as follows:

Basic NPV model

On face value, it looks like the total net inflow for the project over five years coming in at a positive R328 400 is a definite must. But in order to properly analyse this, we need to compute the project’s net present value.

Net present value

The net present value of a project is the current value of all the project’s future cash flows, discounted at the company’s cost of capital.

In basic terms, the R21 200 profit of year one, discounted at the cost of capital rate of 19.32%, is worth only R17 767 at the beginning of that year. Likewise we discount each year’s profit back to its current (year zero) value to get the present value thereof.

The sum of these discounted amounts then make up the net present value:

Net Present Value

The project’s NPV comes out negative at -R14 407. As the NPV is smaller than zero, Peter should not accept the project as it will generate less present value profit than the cost of the funds employed in making that profit. Not the same answer as that of the first look at the project’s profit.

Likewise, doing a basic cost of capital calculation for your company and a NPV calculation for each new project, entrepreneurs can make better financial decisions that will drive bottom line profits instead of just spinning the wheels in one place.

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Financial Management

Which comes first, accounting software or HR software?

Start with accounting software and grow from there.

Peter S. Cohan

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Which do I need more for my small business – accounting software or payroll software? I can’t afford to buy both. And how do I choose between the plethora of options available?

Generally you should start with an accounting package and then add on others as you need them. That said, businesses are like fingerprints: Each one is unique, and has its own set of needs. You may need accounting or payroll or both.

It depends on details like how many staff you employ, how complex your finances are, and how many companies you’re running.

Choose the right software for your business

In my opinion this is one of the most important choices you will make because your accounting software is one of the most important business management tools you will invest in.

If you’re choosing professional software from a reputable software developer, the particular brand name shouldn’t really matter if they are trustworthy and have a strong local presence.

Goedkoop is indeed duurkoop

Too often I hear horror stories of small businesses buying the cheapest product on the shelf which is fine… until things go wrong.

The package doesn’t work properly, they can’t get support, the phones go unanswered and the company they bought the software from doesn’t have the resources to service its customers.

Take advice from your friends, your accountant, your bank, and then make sure you choose a brand with an established reputation and a local office that provides training, support and after-sales service.  Above all, understand that you are making an investment, not a purchase.

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