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Cash Flow

Getting the Basics Right

From start-up to success requires good financial management and a strong focus on cash flow.

Nadine Todd

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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

Case Study
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.

Tools

Starting right

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.

Nadine Todd is the Managing Editor of Entrepreneur Magazine, the How-To guide for growing businesses. Find her on Google+.

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Cash Flow

7 Things Every Entrepreneur Should Know About Managing Cash In The Business

Every entrepreneur needs to know how to prepare for cash, manage it effectively and mitigate fraud.

Chris Ogden

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Cash is complicated. It can’t be tracked properly, it opens up avenues for fraud, it gets stolen, and it is difficult to manage. It’s also an unfortunate reality that, in South Africa, cash payments and transactions are both inevitable and essential. So how can the entrepreneur overcome the challenges of handling cash? Here are seven ways…

1. Digitise

There are many ways to manage payments in the market today. You can Snapscan, you can Zapper, you can EFT and you can use an app to send money from a wallet to a mobile number. The problem is that none of these options recognise the fact that cash is still the leading method of payment in most markets. So, to really accommodate cash, the entrepreneur needs to look to digital solutions.

You can still physically collect cash, but digitise the transactional information so that you can easily identify the transaction and reconcile the cash collector.

Related: 5 Cash Management Tactics Small Businesses Use To Become Bigger Businesses

2. Protect the consumer

Ensuring that every cash transaction is tracked digitally means that you are protecting the consumer if the cash or transaction are lost. There is always the question – how can you service your customers post-payment without proof on your side? Ensure that your cash transactions are audited and accounted for to ensure you can recon accurately.

3. Don’t be a target

High collection points – those points where a lot of cash is collected and held – tend to become targets. Try to avoid putting your business in line of sight by using tools that can either limit the use of high collection points or that can alert the relevant security authorities if a theft occurs. Again, it comes down to digital tools to monitor, track and alert the right people at the right time.

4. Teach your customers

It’s one thing to invest into a bevy of tools and services to protect your transactions and consumers, another to let consumers make any number of silly mistakes. Teach your customers about fraud, potential risks, things to look out for and trust. They shouldn’t hand over their cash without the collector using the right tools or app and should be wary of any transaction that doesn’t have these protections built in.

Related: Improve Your Cash Flow: Manage Your VAT

5. Test and adapt

Invariably, those who want to commit fraud are equally committed to doing so. They will find loopholes and gaps that allow them to take advantage of you and your customers. Your best bet is to constantly test and adapt your systems, to build metrics in-house that measure inconsistencies and report back on any issues.

People are very creative and will find a way of helping themselves to cash that isn’t theirs.

6. Negotiate

Cash is expensive to manage so find ways of negotiating better deals with banks so you get the best fees. Cash-in-transit is expensive, but often necessary when it comes to large cash deposits.

7. Invest in a payment solution

Digital payment solutions aren’t always possible, but try to employ one that is easy to use and that can be gradually introduced to your customers. Adoption may be slow – it can take years to achieve low cash/high digital payments – but it will benefit you and your business in the long term.

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Cash Flow

5 Cash Management Tactics Small Businesses Use To Become Bigger Businesses

Reaching your highest potential as a business owner depends on maintaining positive cash flow.

Lisa Stevens

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You may have heard the phrase “Cash flow is the blood that keeps a business alive.” This couldn’t be truer, as consistent positive cash flow can help a business owner pay expenses, invest in new opportunities or grow a business.

Fortunately, as small-business-owner optimism remains high, most owners expect a healthy cash flow this year. The January 2018 Wells Fargo/Gallup Small Business Index found 77 percent of small-business owners rated their company’s cash flow as very good or somewhat good over the past 12 months, up from 73 percent in November 2017.

To help with managing cash flow, here are five tips you should consider:

1. Spread out your payments

Paying all your business bills at the same time rather than spreading them out can drain your disposable income and leave you at risk of not being able to pay your creditors and suppliers if an unexpected expense occurs.

Instead, try paying your bills closer to the due dates and negotiate with your vendors to see if you can extend your payables to 60 or 90 days.

Also, be sure to pay your most important bills, such as rent and payroll, before paying less important bills.

Related: 8 Ways to Avoid Cash Flow Surprises That Could Kill Your Business

Check with your vendor to see if you can receive discounts for paying any bills early. Remember to pay all your bills before the due date to maintain a good credit standing.

2. Collect payments quickly

Another way to improve cash flow is to incentivise customers to pay early by offering discounts.

Other techniques for collecting payments quickly include requiring deposits from your customers when taking orders and offering online payment options.

Thanks to advancements in technology, there are multiple ways for your customers to complete quick and efficient transactions with your business. One example is electronic billing, which allows for you to customize invoices and set up automatic payment reminders for customers.

credit-policy3. Establish a strict credit policy

It’s important to be wise about extending credit as a business. A non-paying customer can be a hefty expense to a small-business owner.

Establish a written set of standards for determining who is eligible for credit, and enforce those standards rigidly.

Also, be sure to require a credit check for all new customers before extending credit and monitor your accounts to identify late payers early so you can offer them a variety of payment options. These options might include a credit card charge or a payment plan.

4. Align your payroll cycle with your revenue stream

Some businesses, such as restaurants and retailers, generate daily revenue and can more easily cover the expense needed for weekly payroll.

Related: 5 Marketing Missteps That Make Cash Flow And Business Growth Stumble

For others, such as manufacturers, this could be a challenge, and you may benefit from paying employees less frequently, provided applicable wage laws allow you to do so. Refer to your state Department of Labor for pay frequency information.

5. Plan ahead for cash shortages

Expect the unexpected. Typically cash flow will vary, and unexpected expenses will occur even for established businesses.

Keeping a rainy day fund with three to six months of basic operating expenses in a reserve can prepare you for slow periods and emergencies.

Another option is to use a business credit card or business line of credit to pay for everyday expenses and help bridge gaps in cash flow.  Be sure to monitor your expenses with online banking and monthly statements.

Related: How Amazon Is Keeping It Lean

One important tool for planning ahead is a cash flow forecast, usually a one-year prediction of how cash will move in and out of the business. This helps business owners evaluate how profitable future sales will be, and provides an overview of what needs to be done to reach your goals.

In its simplest form, a cash flow forecast should show where cash balances will be at certain points in the future so you can anticipate and prevent cash shortages. To get started, organize your payables and receivables on a spreadsheet to see where money is coming and going.

Ultimately, reaching your highest potential as a business owner and being able to serve your customers effectively depends on maintaining positive cash flow. Following the tips above may help keep your business financially strong and position your company for success.

This article was originally posted here on Entrepreneur.com.

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Cash Flow

Why Cash Flow Is King But Margin is King Kong

Why you should shift your attention from cash flow to creating — and maintaining — strong margins for long-term growth and success.

Allon Raiz

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Conventional business wisdom states that turnover is vanity, profit is sanity, and cash flow is reality. And while this is true (very true), the focus on cash flow can become a distraction to what, in my opinion, is a more important focus. I see cashflow issues as symptomatic of other, hidden elements of running a business properly. The most important lever of all is the creation of margin (gross profits) in your business.

Here are five pointers to consider.

1. Chasing cash flow can be a distraction

The underlying driver for creating margin is creating defendable, distinguishable value for a client. When you create defendable, distinguishable value, it translates into the ability to charge more for your products and services since, by definition, there are lower competitive forces at play along with a higher perceived value.

Higher margins translate into higher net profits and this, over time, goes a long way towards reducing the effects of bad cash flow management.

Related: Strategies To Help You Stay Out Of The Red With Cash Flow

2. Create cash flow systems

When analysing the thousands of businesses to which I have been exposed over the last 18 years, I have seen that the majority of those experiencing cash flow problems have weak to non-existent cash flow systems. A few important systems and approaches can make all the difference in managing your cash flow better, and will give you more time to focus on creating defendable, distinguishable value.

These systems include: Budgets (that are used); creditors’ policies (that are implemented); a tough creditors’ clerk (who has no problem hunting down cash); and nurturing strong relationships with clients (in particular, with their accounts departments).

3. Margin increases resilience

Not only does margin create a cushion of cash that can be used to smooth over delinquent payers, but it also allows for a mindset of freedom to provide additional cost-bearing value-add to clients in emergency situations that require it, without any anxiety as to the overall profitability of the deal. This almost always leads to improved client relationships.

Related: Cash Flow Tips For Small Businesses To Survive Rocky Times

4. Margin increases the depth of core competencies

Some of the profitability generated by increased margin should, in my opinion, be channelled into deepening the core competencies of the business.

Deeper core competencies reinforce the company’s defendable, distinguishable value-add which creates more cash — a virtuous cycle. This cycle needs to be jealously maintained and guarded.

5. Margin keeps the client at the centre of attention

When you focus exclusively on cash flow, you are — to all intents and purposes — focusing on yourself. Your energy is concentrated on insuring that you have sufficient funds to maintain the operations of your business. When your priority is margin, your client becomes the centre of your business existence.

Your focus moves to their needs and solving their problems. This ensures longer-term, more profitable and stronger relationships with your clients. The result — given that proper cash flow systems are in place — is a business that does not experience cash flow issues.

The problem with conventional pieces of business wisdom is that they sound plausible and contain just enough truth for you to make them guidelines in your business. Perhaps a deeper analysis of their true wisdom, and whether or not they are masking a cause or effect, will result in you adopting practices that are more valuable to your business in the long run.

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