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Cash Flow

Cash is King: Managing Cash Flow for Business Survival and Growth

In the end, business survival and growth almost always come back to the same thing: cash!

Greg Fisher

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Part 1

Description of Cash Cycle Analysis

The cash cycle represents the use of cash in the day-to-day operations of the business. A cash cycle analysis is a process of looking at how cash might be unnecessarily locked up in the workings of the business. Within any business, there are three areas where cash may be getting unnecessarily ‘trapped’:

1. Accounts receivable

What customers owe for what you’ve sold on credit. This represents money that ‘belongs’ to your business but is currently inaccessible for operating the business.

2. Inventory

Materials, work-in-process, and finished goods on hand for manufacturing and distribution companies or unbilled services for work already performed but not yet invoiced for service firms.

3. Accounts payable

What you owe suppliers for what you’ve bought on credit. This is an area where, if you fully utilise the credit given to you by suppliers, you can release extra cash into your business.

In doing a cash cycle analysis one carefully analyses how much cash is locked up in each of these elements of the business and then works to unlock this cash in a safe and responsible way. How do you perform a cash cycle analysis to unlock cash within your business?

Step 1

Calculate the cash days for each element of the cash cycle

The first step is to understand how many days’ worth of cash are locked up in each element of the cash cycle. The cash locked up in accounts receivable is calculated as the accounts receivable balance divided by the average sales per day. The cash locked up in inventory is calculated as the inventory balance, divided by the average daily cost of sales; and the cash days in accounts payable is the accounts payable balance divided by the average daily cost of sales (see the equations below for the calculation of these amounts). The total days in the cash cycle can then be calculated as accounts receivable days, plus the inventory days less the accounts payable days.

Step 2

Assess whether the number of days’ cash in each element of the cash cycle is reasonable

All businesses need to have some cash tied up in the cash cycle but the key to effective financial management is to reduce the overall days tied up in the cash cycle to a competitive level. Therefore to have more cash to grow the business you need to try to reduce the number of days in accounts receivable and inventory and to increase the number of days in accounts payable within a range that is reasonable and sensible.

Having calculated the number of days in each element of the cash cycle in step 1, the next step is to assess your business days in each element of the cash cycle in relation to:

  • The number of days in prior periods to see if cash management is improving or declining
  • The number of days provided for in firm policies (the policies of your firm for accounts receivable and inventory and the policies of your suppliers for accounts payable)
  • The number of days of other firms in the industry  (see alongside)

By comparing the days in each element of the cash cycle over time, one can see whether you have been more or less effective at managing your cash over time. By comparing days to firm policies you can assess if firm policies are actually being implemented and by assessing the days’ cash in comparison to others in the industry you can assess whether you are competitive compared to other firms.

Step 3

Set targets for managing each element of the cash cycle

Most people discover that there is room for improvement with respect to the amount of cash tied up in accounts receivable, accounts payable or inventory. The next step is to set targets to improve these balances. The targets for these amounts should be reasonable within the industry in which the firm operates. You should set targets that are ambitious but not so unreasonable that you are unable to operate effectively. For example it may be an industry norm to expect customers to pay invoices on 30 days. It is then unreasonable to set a target of 15 days for accounts receivable. You may need to keep a certain amount of inventory on hand to maintain customer service levels; it is then destructive to set targets that reduce inventory levels to levels that are dangerously low. It is also unwise to set a target to pay accounts payable on 50 days if your supplier’s policy is 30 days; you will just develop poor relations with your supplier.

Step 4

Start managing each element of the cash cycle

Having set targets for improvement, it is time to go to work on managing these balances to achieve the targets that you have set for your business.

To reduce accounts receivable you could:

  • Look to get invoices out more efficiently (eg by email). Incentivise the people in accounts to send out invoices as quickly as possible.
  • Adjust the credit policy to reduce the number of days’ credit allowed to customers (but only do this if it will not have a significant negative effect on sales).
  • Actively follow-up with customers to collect receivables within the credit terms that you have given them.
  • Incentivise customers to pay early (eg by offering discounts or rewards).

To manage the inventory levels downward you could:

  • Identify what inventory you need regularly and what you need less regularly and manage it accordingly, with lower inventory balances for stock that you seldom need.
  • Keep smaller amounts of stock on hand and set up relationships with suppliers where they agree to provide goods more regularly in smaller batches.
  • Identify slow moving and obsolete stock and provide incentives to move it off the floor.

To release cash within the accounts receivable balance, you could:

  • Ensure that you are using the credit terms that customers provide.
  • Negotiate longer credit terms with customers.

If the targets that you set are reasonable and you implement these tactics in a reasonable and responsible way, over time you should be able to reduce the amount of cash tied up in the cash cycle to achieve your goals and have more cash to build the business.

Step 5

Review progress

The cash cycle needs to be reviewed and managed on an ongoing basis. It is amazing how easy it is for the accounts receivable and inventory balance to creep up if unchecked, thereby sucking cash out of the business. The cash cycle numbers — accounts receivable days, inventory days and accounts payable days — should become part of the monthly management dashboard for any business. Managers who observe that these numbers are moving in the wrong direction should immediately investigate and take action to rectify the situation. In this way you can ensure that the business has as much cash as possible to continually fuel growth. »Many times managers think that a cash injection into a business must come from outside the organisation — they desperately apply for bank loans or try to contact a long lost rich uncle to invest in the business. The reality is that you can often engineer extra cash from inside your business if you just manage your finances more effectively. What can you do to ensure that you have adequate cash to keep your business alive? In this article we will highlight a specific process for managing and unlocking cash in your business.

Accessing financial data on other firms in your industry

The easiest place to find financial information about other firms in your industry is to look at the financial statements of firms that are listed on the JSE or AltX exchange.

These firms are required to publish their annual financial statements so their financial information can be accessed via one of the following sources:

  • The company website — usually under the investor relations section
  • The Moneyweb website — go to the website (www.moneyweb.co.za); in the top right corner go to “CLICK-A-COMPANY”; click on the names of the companies that you are interested in and then look for SENS announcements further down the page that contain financial results for the company. From these announcements you can get information required to calculate the number of days in accounts recievable, inventory and/or accounts payable.

Part 2

Case Study

Presto Print

Presto Print is a local printing business doing bulk printing jobs for small and medium size businesses. Samantha Graham, the manager of Presto Print, wants to expand the business but to do so she needs to buy two new printing machines valued at R110 000. She was convinced that she would need to get a bank loan to buy the additional machines but her corporate banker was not getting back to her with an answer on her request for finance.

Getting frustrated she wondered whether there was another option. An examination of her recent set of financial statements reveals that there may be.

Step 2

Assess whether the number of days’ cash in each element of the cash cycle is reasonable

Based on the table of comparisons, it is evident that Samantha Graham needs to implement better accounts receivable management practices at Presto Print. The number of days’ cash in accounts receivable is creeping up over time and it is much higher than the firm policy and the industry average. It also appears that there is room for improvement in her inventory management practices.

She has too many days’ worth of cash tied up in inventory compared to the industry average and she has never established an inventory management policy specifying how much inventory she intends to keep on hand. There appears to be less opportunity to release cash through the accounts payable balance. It would be irresponsible to extend it much higher than its current level as her suppliers credit policy is for outstanding invoices to be paid on 30 days.

Step 3

Set targets for managing each element of the cash cycle

The next step is to set targets for how many days’ cash Presto Print should aim to have tied up in each element of the cash cycle. Based on the assessment of the industry averages and the firm policies and after consultation with the other employees in her business, Samantha Graham decided to set the following targets:

  • Accounts receivable days:  36 days
  • Inventory days: 30 days
  • Accounts payable days: 35 days

To achieve these targets she would need to reduce accounts receivable by 11,93 days, which would result in (R2 101 085 /365 days) x 11,93 days = R68 673 extra cash. If she reduced inventory down to 30 days she would release another (R845 095/365 days) x 38,92 days = R90 113 worth of cash into the business. Therefore, through careful management of the accounts receivable and inventory balance there is the potential to release more than R150 000 worth of cash into the business at current business levels.

Step 4

Go to work at managing each element of the cash cycle

Having established reasonable targets for each element of the cash cycle, the next step is to aggressively manage these elements of the business to achieve the targets.

To do this, Samantha Graham first shared the targets with all her staff and explained why and how the management of these elements of the business would have a significant positive impact on the business. Furthermore, she promised that if they achieved the targets and maintained them for six months she would take them and their partners out for a dinner at a fancy restaurant and grant each of them two extra days of paid leave in the following year.

Thereafter, she worked with her accountant to put more processes in place to get invoices out quicker and to follow up on payments five days before they are due, on the day they are due and every two days after they are overdue. She also reviewed her debtors book over the last two years and identified the clients that were most guilty of paying very late. She called each one up and had a friendly but firm conversation with them saying that she was thrilled to have their business but then reminding them of the policies and asking them in a nice way to please try to comply.

Furthermore, she reviewed the inventory balances for the past two years and discovered that they were keeping large amounts of paper on hand that was very seldom requested by clients. She identified all the paper that fell into this category and called her supplier asking if they would be willing to take some of it back at a discount as payment for some of Presto Print’s recent purchases. They agreed! She then categorised all the paper and ink that they stored on hand according to how regularly it was used. She set targets for the amount of each category of inventory

they would keep on hand. She then called Presto Print’s suppliers to confirm how long it would take them to deliver paper and ink from the time of order. Using this information she set reorder levels for each category of inventory. She made the reorder levels clear to all her staff and instructed them to inform her when they reached the reorder levels. After seven months of implementing these simple but effective tactics, the accounts receivable and inventory levels were nearing their targets and Samantha had much more free cash flow in the business to fund growth and capital acquisitions.

Step 5

Review progress

After a few months, Samantha asked her accountant to create a simple weekly report that would give her the weekly sales, the number and amount of invoices sent out that week, the accounts receivable balance, the inventory balances by category and the accounts payable balance. This information gave her much richer insight into her business and allowed her to make highly informed management decisions. She put the targets for accounts receivable days, inventory days and accounts payable days up on a large whiteboard in the office. Each month she filled in the actual balance next to the target so that all employees could see how close they were to achieving the target.

Greg Fisher, PhD, is an Assistant Professor in the Management & Entrepreneurship Department at the Kelley School of Business, Indiana University. He teaches courses on Strategy, Entrepreneurship, and Turnaround Management. He has a PhD in Strategy and Entrepreneurship from the Foster School of Business at the University of Washington in Seattle and an MBA from the Gordon Institute of Business Science (GIBS). He is also a visiting lecturer at GIBS.

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Cash Flow

Marnus Broodryk Shares Alternative Funding Solutions And How You Can Finance Your Growth

We’ve all heard the saying turnover is vanity, profit is sanity but cash is reality. If you want to improve cash flow, unlock growth within your business and build an asset of value, you need cash — whether that’s through organically grown cash reserves or financing solutions that suit your specific needs and growth goals.

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Survey after survey shows cash flow problems as one of the biggest challenges facing South African (and global) entrepreneurs.

Most aspiring entrepreneurs say that they don’t have the capital they need to start their businesses, and blossoming businesses face the same challenge. No capital equals no growth. The good news is that there are so many ways to access capital to help you grow, from unlocking cash flow in your business to finding the right financing solution.

From traditional banks to alternative financing solutions, there are also a range of different products available to suit your needs.

Unlocking cash flow to fund yourself

  • Bootstrap: This means to grow the business slowly, with lean business operations. The money comes from the work the business does, for example, when you bootstrap you may take pre-orders for your product, thereby using the funds generated from the orders to actually build and deliver the product itself.
  • Customer Deposits: If you are in need of easy-to-access short-term working capital, one of the easiest options to raise funds is by asking your customers to pay a deposit. The deposit also provides you with a safety net when customers don’t pay.
  • Supplier Finance: Supplier finance, simply put, means you get the stock you need now and only pay later, usually 30 days. This is a useful form of short term finance.
  • Mortgage Loans: Some entrepreneurs use their home loans to finance their businesses. In doing this there are some risks and tax considerations, so make sure you do your research.

Related: A Comprehensive List Of Angel Investors That Fund South African Start-Ups

Financing your growth

If this isn’t possible, there is still hope. Globally, more and more financial institutions are offering alternative financing products for businesses. This is often easier to access than a traditional overdraft, term loan or credit card facility, because it uses other forms of security.

  • Asset Finance: Using the assets within your business to borrow money or get a loan. The assets act as security for the lender. Asset financing is most often used when a borrower needs a short-term cash loan or working capital.
  • Contract Finance: If you have a signed contract to deliver goods/services you can use that contract to obtain a loan to complete the work. The money must be used to complete said contract.
  • Trade Finance: Also referred to as Inventory Finance, Import Finance or Stock Finance. In simple terms this means raising finance against the stock you are buying. The stock serves as security.
  • Debtor Finance: A lender will ‘buy’ your unpaid invoices from you, effectively using the unpaid invoices as security for the borrowing. It is usually used to improve cash flow or working capital. In order for a lender to ‘buy’ the invoice, the work has to have been completed and the lender will charge a small percentage.
  • Property Finance: When financing a property for your business, the function of the building will determine what type of lender you approach. If you intend to use the building for rental income, it would be considered a bigger risk than using it for your office space. In general property finance works like a term loan, only its duration is for a maximum of ten years.
  • Point-of-sale Financing: If you are a retailer and use a credit card machine, then there are institutions who will provide you with a loan against the future inflow of credit card transactions. This is often an easy way to get capital and the repayments are a percentage of future sales — making it easier to repay.

If you own a good business, there’s no reason why you shouldn’t get financing. Perhaps traditional banks aren’t your solution, but know that there are other options out there. Some easier than others.

Related: Government Funding And Grants For Small Businesses

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Cash Flow

Outsmart Cash Flow Problems With The Right Financing

We’ve all heard the saying turnover is vanity, profit is sanity but cash is reality. If you want to improve cash flow, unlock growth within your business and build an asset of value, you need cash — whether that’s through organically grown cash reserves or financing solutions that suit your specific needs and growth goals.

Nadine Todd

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Did you know that SMEs with access to credit can grow faster and achieve optimal size sooner, while those with limited access to finance potentially remain stagnant and smaller in size? This is according to the Finmark Trust study, released in 2016.

“There are a number of research studies that confirm the link between access to finance and business growth, showing that increased access to funding increases revenue and job growth in SMEs,” says Darlene Menzies, founder of finfind.co.za, a platform that helps SMEs access finance in South Africa.

“Access to finance improves cash flow, which enables business owners to invest in business growth,” continues Darlene. “According to FinFind’s SA SMME Access to Finance Report, business expansion is the number one reason for businesses requesting funding.”

“Working capital is essential for the day-to-day operations of a business,” agrees Shayne Burnstein, director of Swypefin, which offers alternative funding solutions. “More often than not, business owners lack sufficient working capital to meet their daily cash flow requirements or expand their operations. This can ultimately lead to the failure of the business. It’s common for a business to borrow capital and by using the basic principles of leverage, they can invest in assets that generate higher returns.”

“The reality is that growing a business requires money,” says Darlene. “Capital is needed to fund the increased expenses incurred to prepare for and facilitate increased revenue growth. Businesses that secure funding can invest in hiring more staff, secure bigger premises, expand into new markets or new products and services, purchase additional equipment, vehicles and machinery, as well as fund larger marketing budgets, amongst other things.

“Without access to finance the speed of business growth is reduced and, in many cases, the ability to achieve the potential of increased revenues, profits and job creation is jeopardised.”

According to Darlene, businesses that can secure funding and have the guarantee of working capital and cash flow availability are better positioned to employ and retain more skilled and experienced staff, to negotiate more favourable payment terms with suppliers, and to build better trading track records and improve their credit scores, all of which increase their ability to raise more finance and continue to bolster increased business growth and create more employment opportunities.

The challenge of cash flow

Karl Westvig, CEO of Retail Capital, says that more than 80% of business owners have identified seasonal cashflow as the greatest challenge facing the SME sector today. “Restrictions in cashflow inhibit plans for renovation and expansion, but mostly for stock purchasing, which has a direct knock-on effect on the profits and employment rates of the retail sector,” he says. “Giving business owners easy access to working capital allows them to get back to servicing the market while they partner with a financial provider for growth.”

Related: Karl Westvig Of Retail Capital Shares His Insights Into A Year-On-Year Double-Digit Growth Business

“The biggest challenge that SMEs face is cash flow. Cash flow is king and that’s where finance products play a role,” agrees Linda Fröhlicht, Head of Business Banking, Sasfin. “They enable growth by giving the business owner cash to grow their business.” Of course, there’s always a balance. “There’s a cost to accessing finance, which means 
it’s essential that you’re accessing it to help you grow your business, rather than to service debt.

“If you borrow money to enable the growth of your business, the finance cost is actually part of the cost of your sales. But if it’s to service debt, or you can’t afford the finance, you’ve got a problem and it will only damage your business.”

According to Linda, it’s important to understand your margins, if you can sustain the cost of finance with your margins and if the product you’re looking at makes sense in terms of your business and your growth plans.

“The upside is that a financier can provide you with growth, because they’re going to give you access to cash, enabling you to grow your business. It’s a working capital solution — it’s not debt. We evaluate businesses and business owners to gain a deep understanding of the entrepreneur’s needs, first to ensure affordability and second to evaluate if the right product is being utilised to drive growth.”

Making finance work for you

SHAYNE BURNSTEIN

Shayne Burnstein, director of Swypefin

According to FinFind’s SA SMME Access to Finance Report, the top six reasons that SME business owners request access to funding are to expand their businesses, for cash flow assistance, buying equipment, working capital, funding a contract and for property development.

There are many ways to use this capital, provided you understand your business needs and have a clear growth strategy. “We advise our clients to use the money on strategic initiatives that will ensure, and have a direct impact on, business growth and profitability, instead of personal expenses and debt management,” says Karl. “We have seen the majority of our clients seeing early profit yields (from four to six months) when funding was used for stock purchasing, renovations and expansions instead of salaries, holidays and debt repayments.”

A strategic deployment of funds can be anything from investing in the right equipment that will help you grow your business to securing early settlement discounts — all of which have the potential to boost growth in your business.

An example of early settlement discounts can be found in the retail industry. “Currently retailers are trading under very challenging conditions. With VAT and the price of petrol increasing, consumers have tightened their belts,” says Shayne. “Under these conditions suppliers are offering retailers trade discounts for COD payments. It often makes sense for them to borrow the capital to take advantage of the trade discounts, enabling the retailer to increase their margins.”

The same is true when it comes to importing goods. “Importing goods takes time,” says Linda. “From the shipment to bill of loading, three weeks on the water, turning raw materials into a finished article, selling the products, and then waiting an additional 60 days for your debtors to pay you — cash flow becomes a real challenge.

“Finance products and terms that fit in with your cash flow cycle are meaningful. In addition, if you make an upfront payment to an exporter, you can also negotiate discounts. You can then offset a portion of the discount you will receive from the supplier to finance fees.”

Growth capital can be used in any industry and any-sized business, from a dentist or doctor’s business to a clothing manufacturer. “Advancements in 3D printing technology enable dentists that historically relied on outsourcing a technician to make dental crowns, for example,” says Shayne. “This process typically takes a few weeks at a considerable cost.

Related: 10 Expert Tips On Managing Cash Flow As A New Business

By borrowing capital to purchase 3D printing equipment, the dentist can bypass the technician and make the crown in an hour, allowing them to see more patients, which would significantly increase their turnover. As a business owner, you need to critically consider what will help you grow your business: Is it new equipment, bigger premises or marketing spend? What can you invest in that will grow your turnover and your profit margins? That’s where financing makes sense.”

Karl agrees. “Any business can benefit from both alternative and traditional funding products when invested in growth initiatives,” he says, adding that businesses in seasonal trade industries in particular should investigate the alternative funding products available to them. “Because of fluctuating cashflow, seasonal businesses usually find it difficult to access traditional business financing channels. The application process can be long and arduous, whereas alternative funding allows quick access to working capital, and repayments are linked to cash flow.”

Karl does have a word of advice for business owners considering their financing options: “Don’t wait too long when thinking of applying for funding.

Once turnover has dropped too much, it affects a business’s affordability, and when funding is obtained it’s then often used as emergency funding and meeting commitments instead of investing in business profit and growth initiatives. It’s also important to deal with credible funding providers that provide consultants and assistance to the business owner with industry advice and economical insights on where the best opportunities for growth exist.”

Alternative financing solutions

karl-westvig

Karl Westvig, CEO, Retail Capital

Studies such as the CB insights study on fintechs, the World Bank Group (2017) on Alternative Data Transforming SMME Finance and the IFC’s (2010) SME Banking Knowledge Guide show that fintechs are able to reduce many of the pain points and barriers to SME funding and importantly facilitate increased scale.

“Funding aggregators are automating funding matches, generating quality leads for funders and reducing search costs for both the providers and seekers, while online lenders are reducing approvals to less than 48 hours and funding disbursements shortly thereafter,” says Darlene.

“Our innovative funding products provide an alternative to traditional business finance loans,” explains Karl, highlighting Retail Capital’s alternative funding solution. “We determine business affordability by assessing expected future sales, linking payments to your business turnover. We offer fixed or flexible repayment options, linking it to your cash flow cycles and business needs, to ensure affordability.”

The rise of fintechs that are able to provide alternative funding solutions is largely thanks to innovative tech advancements and algorithms that can evaluate businesses based purely on multiple data points.

“By automating processes and gaining more insight into available data, fintech companies are able to make more informed decisions regarding the credit profile of clients,” says Shayne. “We have developed an algorithm that looks at your previous 12 months’ turnover in order to determine an amount of your future sales that we can advance to you,” he continues, explaining how Swypefin’s product works.

“Our repayments are based on a percentage of your turnover, which allows you the flexibility to pay less in the months in which your cash flow is constrained and pay more in your busier months. We do not tie up your assets as collateral. Our fee is fixed, transparent and pre-agreed upfront. You will never be liable to pay more than what is agreed upon. If the advance is settled early we offer a pro rata refund on the fixed fee depending on when settlement takes place.”

Positive cash flow and smart financing solutions

linda-frohlich

Linda Frohlich, Head of Business Banking, Sasfin

Ultimately, finance should support your business and help you grow. With that in mind, Linda unpacks when you shouldn’t be accessing finance, and how to ensure you remain on the path to growth rather than bad debt and business failure.

“One of the biggest issues we see are companies that overtrade and get themselves stuck in a debt cycle,” she explains. “In simple terms, a business that is overtrading has orders, but not the infrastructure to meet those orders. If there’s a clear growth strategy in place matched with the right financing vehicles, this growth can be planned, controlled and executed, but many entrepreneurs want to run before they can walk.

“When this happens, the business will invest in expensive fixed assets in order to meet orders, and then the necessary orders don’t come in, or something happens to disrupt the business. Now the business is playing catch-up, and the business owner needs finance to cover debt.”

Related: Understanding Cash Flow

According to Linda, the biggest cause of over-trading is failing to plan cash flow. “This is one of the first questions we ask: Do you have a strategy in place and a cash flow projection? Not just for this year, but this month, week, and even on a day-by-day basis.

Another key error many business owners make is using the deposit from one contract to kick start another contract. “There’s a domino effect when this happens. The business very quickly gets totally out of kilter, and the owner never quite manages to get on top of his finances. To avoid this trap, concentrate on finishing the job at hand. Ensure that you allocate the funds that you get to where you lent the money from — no matter what.

“This goes back to managing cash flow. Business owners believe that finding a second project from the first (when it’s not finished and the money isn’t in the bank) 
will help them grow. Instead, it just kills their business.

“Cash is king and never borrowing money can cap your growth, but you need to understand the difference between healthy debt and bad debt.”

Financing property

suraj-lallchand

Suraj Lallchand, Director at Fedgroup Ventures, a division of Fedgroup.

While the solutions for cash flow assistance, buying equipment, working capital and funding a contract are similar to each other, property development is specific.

Done correctly, investing in the commercial property from which you run your business can make strong financial sense and result in savings on your bottom line.

“Many business owners who own their premises have two separate companies,” explains Suraj Lallchand, director at Fedgroup Ventures, a division of Fedgroup. “The first is the original company that actually runs the operations, and the second is a ‘prop co’ that owns the property.”

The reasons for this are simple: There are tax benefits, it opens a second income stream, and it keeps the two entities separate, allowing the business owner to one day sell the business while maintaining the property portfolio they have built up. In many cases, if the business is sold but remains in the premises, as the property owner they will continue to draw rental fees from 
the business.

“It’s a simple process,” explains Suraj. “You would put the property into the prop co, take a loan against the property, and charge rent to the operations company. This then becomes a taxable deduction for the operational company, and the interest you pay on the loan for the building is deductible for the prop co. As a result, you bring your taxable income down to a minimal amount. We see many companies that would rather purchase their own properties and take the tax deductions than continue to rent.”

The key to owning your own commercial property is whether or not the operations company can afford the rental and has strong prospects for the future. “If you can’t occupy the building and you don’t find a tenant, the prop co will end up defaulting on its loan and losing the property,” he adds.

“We always do our due diligence on the borrower and the property in question,” agrees Rick de Sousa, Head of Commercial Property Finance at Fedgroup. “The security we are lending against is determined by the value of the property as well as the owner’s ability to service the loan. If the owner of the business is purchasing the property, then the business’s stability and projected income is an important factor for us to consider.”

According to Rick, there is a completely different level of responsibility involved when you purchase premises compared to rent. “It’s a good example of risk and return,” he says. “Your risks increase, and it becomes your responsibility to ensure the building is maintained, rates and taxes are being paid, security, insurance, health and safety — you no longer have a landlord taking care of any of these things — but the returns should be commensurate with that risk.”

Rick’s advice is that you ensure the yield of the property makes sense. “Property has proven to outperform inflation. It’s generally in the high teens. In addition, commercial property is pretty predictable when it comes to rentals as well. You can bank on a yearly increase of 6% to 8%. This all aligns with whether the property is well managed though, and if you’re the landlord and the tenant, whether your business can continue to pay the rentals for the foreseeable future.”

From a property owner’s perspective, Fedgroup’s terms are flexible. “We can lend up to 75% of the asset value,” says Rick. “We also give interest-only terms. This means you can choose to only pay the interest, and once the business has grown and your revenues have increased, you can elect to start paying capital, or you can continue to only pay your interest and see returns once the property has appreciated and is sold. Those returns can then be invested in the next property.”

Over and above the flexible terms and the fact that Fedgroup does not prescribe how funds are allocated once the loan has been granted, Rick believes their clients benefit from the property experience of the division’s team and partners. “We can talk property with them, which is extremely valuable when making such a big decision.”

Property portfolios

“Many businesses keep the company and property portfolio separate. There are tax benefits, it opens a second income stream, and it keeps the two entities separate, allowing the business owner to one day sell the business while maintaining the property portfolio they have built up.” — Suraj Lallchand, Director at Fedgroup Ventures, a division of Fedgroup.

Growth through property

“Owning commercial property is a good example of risk and return. Your risks increase, but the returns should be commensurate with that risk.” — Rick de Sousa, Head of Commercial Property Finance at Fedgroup.

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Cash Flow

Outsmart Cash Flow Problems With The Right Finance Solution

To unlock growth within your business and build an asset of value, you need cash. Have you investigated the financing solutions that suit your specific needs and growth goals?

SwypeFin

Published

on

cash-flow-management-financing

Did you know that SMEs with access to credit can grow faster and achieve optimal size sooner, while those with limited access to finance potentially remain stagnant and smaller in size? This is according to the Finmark Trust study, released in 2016. There are a number of research studies that confirm the link between access to finance and business growth, showing that increased access to funding increases revenue and job growth in SMEs.

Access to finance improves cash flow, which enables business owners to invest in business growth. According to FinFind’s SA SMME Access to Finance Report, business expansion is the number one reason for businesses requesting funding.

“Working capital is essential for the day-to-day operations of a business,” says Shayne Burnstein, director of Swypefin, which offers alternative funding solutions.

“More often than not, business owners lack sufficient working capital to meet their daily cash flow requirements or expand their operations. This can ultimately lead to the failure of the business. It’s common for a business to borrow capital and by using the basic principles of leverage, they can invest in assets that generate higher returns.”

The reality is that growing a business requires money. Capital is needed to fund the increased expenses incurred to prepare for and facilitate increased revenue growth. Businesses that secure funding can invest in hiring more staff, secure bigger premises, expand into new markets or new products and services, purchase additional equipment, vehicles and machinery, as well as fund larger marketing budgets, amongst other things.

Without access to finance the speed of business growth is reduced and, in many cases, the ability to achieve the potential of increased revenues, profits and job creation is jeopardised.

Related: Free Business Plan Template Download

Making finance work for you

According to FinFind’s SA SMME Access to Finance Report, the top six reasons that SME business owners request access to funding are to expand their businesses, for cash flow assistance, buying equipment, working capital, funding a contract and for property development.

There are many ways to use this capital, provided you understand your business needs and have a clear growth strategy. A strategic deployment of funds can be anything from investing in the right equipment that will help you grow your business to securing early settlement discounts — all of which have the potential to boost growth in your business.

An example of early settlement discounts can be found in the retail industry. “Currently retailers are trading under very challenging conditions. With VAT and the price of petrol increasing, consumers have tightened their belts,” says Shayne. “Under these conditions suppliers are offering retailers trade discounts for COD payments. It often makes sense for them to borrow the capital to take advantage of the trade discounts, enabling the retailer to increase their margins.”

Growth capital can be used in any industry and any-sized business, from a dentist or doctor’s business to a clothing manufacturer. “Advancements in 3D printing technology enable dentists that historically relied on outsourcing a technician to make dental crowns, for example,” says Shayne.

“This process typically takes a few weeks at a considerable cost. By borrowing capital to purchase 3D printing equipment, the dentist can bypass the technician and make the crown in an hour, allowing them to see more patients, which would significantly increase their turnover. As a business owner, you need to critically consider what will help you grow your business: Is it new equipment, bigger premises or marketing spend? What can you invest in that will grow your turnover and your profit margins? That’s where financing makes sense.”

Alternative financing solutions

Studies such as the CB insights study on fintechs, the World Bank Group (2017) on Alternative Data Transforming SMME Finance and the IFC’s (2010) SME Banking Knowledge Guide show that fintechs are able to reduce many of the pain points and barriers to SME funding and importantly facilitate increased scale.

Related: Venture Capital 101: The Ultimate Guide To The Term Sheet

“By automating processes and gaining more insight into available data, fintech companies are able to make more informed decisions regarding the credit profile of clients,” says Shayne. “We have developed an algorithm that looks at your previous 12 months’ turnover in order to determine an amount of your future sales that we can advance to you,” he continues, explaining how Swypefin’s product works.

“Our repayments are based on a percentage of your turnover, which allows you the flexibility to pay less in the months in which your cash flow is constrained and pay more in your busier months. We do not tie up your assets as collateral. Our fee is fixed, transparent and pre-agreed upfront. You will never be liable to pay more than what is agreed upon. If the advance is settled early we offer a pro rata refund on the fixed fee depending on when settlement takes place.”

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