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Cash Flow

The Legal Side of Debts

The concept of prescription and how it relates to cash flow: Some practical tips for business owners.

Nicolene Schoeman-Louw

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Business Cash Flow

The concept of prescription – where a debt – ‘an amount legally owing’ expires or ceases to exist can be a valuable legal defence for a debtor to raise and an equally valuable motivation for creditors / plaintiffs to timeously collect their outstanding debts alternatively to know the risks involved and their legal rights. This is specifically relevant in respect of cash flow and related issues in a business.

The abovementioned concept is regulated by the Prescription Act 68 of 1969, which provides (in section 10(1)) that a debt (and in this context a debt has a very wide meaning in that it essentially means a claim in law – see below), expires or ceases to exist by way of prescription within a set  amount of time.

These provisions simply exist in order to create legal certainty. It is in the interest of justice and fairness that a legal claim does not exist for an indefinite period of time. This is especially when for example documents relating to the matter may have gone missing and witnesses who would have testified may have died or become untraceable

Accordingly, aside from some special prescriptive periods for debts secured by mortgages, judgments, and tax debts, the general prescriptive period is three years from the date that the debt became legally due. This needs to be observed by all business owners when considering whether to enforce any legal claim as collecting amounts legally owing is vital to the cash flow of any business.

The definition of ‘debt’ for prescription

Bester NNO and others NNO v Schmidt Bou Ontwikkelings CC (696/11) [2012] ZASCA 125. The question raised in this case was whether the rectification of a deed of transfer qualifies as a debt for the purposes of prescription.

The facts of the case are briefly as follows:

The seller was the owner of a large Erf in Sedgefield. In 2003 the Erf was subdivided and a portion sold. The parties intended that the purchaser would become the owner of a portion sold only and that the seller would retain ownership of the remainder.

However, the remainder was erroneously transferred along with the portion sold. Years later the seller applied for rectification of the deed of transfer to reflect it as the owner of the remainder. The purchaser contended that the seller’s claim had become extinguished by prescription because the applicable three year prescription period has expired.

The court held that since the deed of transfer did not reflect the correct state of affairs, rectification of the deed would not constitute re-delivery of the property, symbolic or otherwise. Rectification does not have the effect of changing the rights and duties of the parties, but merely constituted a formality / administrative measure to correct the true state of affairs on paper.

Accordingly this case illustrates that to the contrary of the transfer in question only a legally enforceable right will dictate the application of the Prescription Act. It is important to understand these concepts accurately in order to avoid incurring unnecessary costs or wasting time, either of which could easily cripple any business.

General principles

The Act also provides (in section 15(1)) that prescription may be interrupted. The act is very clear in this regard it is only interrupted when legal process is issued, this however does not entail only the issuance of a letter of demand, but in fact a summons should be issued and served or another appropriate Court process if applicable.

The question often arises when a creditor does issue for example a summons but once it has been served fails to take further steps, how does this affect prescription?
This was one of the issues facing the Supreme Court of Appeal in Cadac (Pty) Ltd v Weber-Stephen Products Co 2011 (3) SA 570 (SCA).

“… the interruption of prescription [by service of a summons] shall lapse, and the running of prescription shall not be deemed to have been interrupted, if the creditor does not successfully prosecute his claim under the process in question to final judgment … “

Arguably according to some colleagues this provision could have been interpreted to mean that where a summons lapses prescription continues to run as if no summons was served. However, the court ruled to the contrary that the service of a summons interrupts the running of prescription, and prescription does not resume running if the creditor takes no further action.

However, in terms of the rules of court a summons lapses and accordingly a debtor may compel a creditor to adhere to these rules even where prescription does not run as set out above.

Conclusion

It is important to accurately understand the concept of prescription and to consider these when bringing a legal claim. Creditors need to observe this before instituting a claim against a debtor and debtors need to observe this when they are facing claims with a long history. Effective planning and monitoring outstanding claims is vital to healthy cash flow in any business.

Nicolene Schoeman – Louw is an admitted attorney of the High Court of South Africa, as well as being a Conveyancer, Notary Public and Mediator. She is the Managing Director of Schoemanlaw Inc Attorneys, Conveyancers and Notaries Public (Schoemanlaw Inc Attorneys) in Cape Town. Visit www.schoemanlaw.co.za for more information or email enquiries@schoemanlaw.co.za

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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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