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.“
- 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.
The Simple Way To Pay Wages When Your Staff Don’t Have Bank Accounts
If you have employed casual workers over the busy season, you can pay wages even if they do not have bank accounts.
At Absa Business Banking, the things that are important to you are just as important to us. We understand your business needs, which is why we have developed tailored solutions to help you where it counts. Take CashSend Plus, for example. It is a payment solution that enables you to pay workers even if they do not have bank accounts.
It is safe and secure
Your employee will receive a six-digit access code and a ten-digit reference number, so that they can verify the transaction. The money is instantly available at an Absa ATM.
You can even pay yourself
We have all lost bank cards or wallets at some point in our lives. What an inconvenience. Well, it is good to know then that you can access cash by sending it to yourself. Now, that is what we call better.
Please speak to one of our consultants or call 0860 111 123 or visit your nearest branch.
Absa Business Banking
Do better business. Prosper.
Entrepreneurial Balancing Acts with Debt
Young South African entrepreneurs face many challenges when it comes to debt-related financing. Small and medium enterprise (SME) owners typically require extensive debt financing from bank and non-bank lenders.
Young South African entrepreneurs face many challenges when it comes to debt-related financing. Small and medium enterprise (SME) owners typically require extensive debt financing from bank and non-bank lenders. Unfortunately, many South African entrepreneurs are limited in their ability to access capital markets. Among others, the major challenges facing entrepreneurs include lack of credit history, no collateral, shaky credentials, and unformulated business plans.
Regardless, SA entrepreneurs are forging ahead and using multiple resources at their disposal such as payday loan providers, non-bank lenders, family and friends, crowdfunding and other economic empowerment initiatives to raise the necessary seed capital for investment purposes. Given the staggering unemployment rate in the country (+25%), the only way out for many people appears to be entrepreneurship. The 2008 global financial crisis threw the economy for a loop, and now the hopes and dreams of many South Africans hang in the balance.
ISM Study Sheds Light on SA Entrepreneurial Pros and Cons
An intensive study conducted by the University of Cape Town’s Unilever Institute of Strategic Marketing (ISM) found that the country is experiencing ‘a crisis of aspiration’. Simply put, many South Africans are struggling to attain their career objectives in an economy that has been ravaged by corruption, mismanagement, and scandal. Despite tough economic times, South African entrepreneurs are determined to try their luck. Pressing challenges in the form of rising unemployment, and an economy mired in failure are challenging entrepreneurs to be more inventive than ever before. The most volatile component of the economic spectrum in South Africa is the middle class.
Many South African families have lived the high life, or ascended the rungs and then been knocked down a peg. This instability is creating added volatility in a country where high crime, mismanagement and political rancour pepper the scene. For many entrepreneurs, any access to credit is a godsend. Banks and non-bank providers offering personal loans, business loans, or credit card funds invariably expose themselves to debt default. For entrepreneurs, it’s important to know where to draw the line. Access to lines of credit in a crippled economy is significantly more valuable than the equivalent access in a developed economy.
How to Know when you are Overstretched as an Entrepreneur
Debt is considered a prerequisite for investment purposes. Most South Africans simply don’t have the necessary capital to start up a high-tech venture, fund a new business, or conduct marketing and advertising activity. As such, lines of credit are increasingly being used to propel business activity among SMEs – both in the formal and the informal sector. However, once debt reaches untenable levels, the tough questions need to be asked. For example, if multiple loans and multiple payments are required monthly, revenue streams need to be evaluated against expenses to gauge whether this is a feasible status quo.
Related: How To Handle Your Post-Holiday Debt
Many entrepreneurs find it difficult to manage multiple loans simultaneously, although it is necessary to acquire the capital from multiple sources. One of the ways to deal with these types of exigencies is a single loan from a low-cost lender in the form of debt consolidation loans. Simply put, these loans are provided by bank or non-bank lenders at lower interest rates than the prevailing interest rate on other lines of credit. By taking out a debt consolidation loan, the entrepreneur has more disposable income over time by not paying the higher interest on credit card debt.
Escape Debt Before Debt Consumes You
There are several other ways to know when your personal financial situation has reached critical mass. For starters, the nature of your business may require you to continue dipping into lines of credit to maintain business operations. If you don’t have the requisite discipline to stop indebting yourself, you may not be able to get out of debt. Debt consolidation is only effective insofar as you have the necessary discipline to put an end to debt financing of all business-related activity.
Credit should be used sparingly, and profits should be generated to allow your business to prosper. In a tight economic climate, costs are the bugbear that need to be attacked. Lavish trappings are unnecessary for business functionality – modest budgets, and high-quality goods and services are far more effective than window dressing at a premium.
How South Africa’s Small Businesses Plan To Invest Their Money In 2018
Here are their five areas they should focus their attention on in the next year and beyond.
Despite economic uncertainty, South Africa’s small businesses are positive about the future. In fact, our State of South African Small Business report reveals that 40% of small businesses are expecting to grow. However, to achieve growth without overextending their limited resources, small businesses need to invest wisely.
Here are their five areas they should focus their attention on in the next year and beyond.
When times are tight, companies typically reduce their marketing spend. This isn’t the case for 36% of South Africa’s small businesses. These respondents recognise marketing as a critical investment area.
They’d rather make a concerted effort to grow their customer base, than sit still and do nothing as consumer demand declines.
Without access to the latest technology, business growth can quickly stagnate. This is why 23% of South Africa’s small businesses plan to invest in up to date equipment, whether that be new machinery, mobile devices or computers.
The right investment in this area can give a business a real competitive advantage.
It can help boost profits and improve operational efficiency – both of which can help a small business withstand difficult economic conditions with greater success.
Consumers are spoiled for choice. Their needs are constantly changing and companies can’t afford to become complacent. To keep up with market demands, 22% of small businesses plan to invest in product development. Barring a few timeless classics, most products need a regular review and tweak to stay relevant and popular.
Digitisation is transforming business functions across the board. Technologies, like cloud software can take care of laborious administrative work.
This liberates employees from time-consuming tasks, enabling them to focus on more strategic work like customer retention and acquisition.
Technology has the power to improve productivity and efficiency. Which is why 18% of small businesses are going to focus their investment plans on this area of their businesses.
The customer should always be the priority. It doesn’t matter how good a product is, if there are no customers, then there’s no business. As competition increases, the user experience becomes more and more important to win over customers.
Business growth depends on happy customers and to achieve that, 18% of small businesses plan to invest in delivering better service.
All five of the above business areas are worthy investment focuses. The question is, how does a small business work out what to invest where? The only way it can invest effectively is with a full view of its company finances. A small business needs to be able to see which functions have provided the best return on investment to date.
It also needs to consider how much investment capital it has to spend. What’s more, before it makes an investment in say, marketing or product development, it must know exactly how and where the money needs to go.
The right software can help a small business access the real-time insights it needs to make better, faster financial decisions. To combat increased competition and market uncertainty, South Africa’s small business owners need access to up-to-the minute information from any device no matter where they are. An informed investment has the greatest chance of success.
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