Cash flow is one of the leading causes of small business failure – with 75% of small to medium sized enterprises (SMEs) struggling to sustain themselves past their first five years of operation. The announcement that South Africa’s economy has shrunk by 3.2% in the first quarter of 2019 has added to the pressure placed on small business owners to manage their cash flow effectively.
“Well-managed cash flow is a positive indicator of a business’s financial health,” says Daniel Goldberg, co-founder of Bridgement, a FinTech company offering invoice financing and revolving credit facilities to SMEs. “Small businesses can survive a cash flow crunch, but one wrong move could sink them. A well-crafted plan of action to get through tough times is a necessity. Salaries and bills need to be paid at month-end – even if your clients haven’t paid yet.”
Goldberg offers some advice to SME owners to help them manage their cash flow effectively:
Nurture good business relationships – be on good payment terms with your suppliers and try negotiating a 30 to 60-day repayment to help offset your slow-paying clients. Even better, negotiate upfront payment terms with clients.
Take control – use discounts to incentivise early settlements from clients and offer alternative payment methods like credit card instead of relying on EFTs. Studies show that you’re likely to get paid 10 days sooner when you offer clients the option to pay by credit card. With cloud accounting apps this is easier than ever to implement.
Use best accounting practices – manage client information effectively with accounting software packages that are integrated with your bank account. Cloud accounting software and apps improve debtor management by automatically sending clients reminders to pay outstanding invoices – even charging interest when they’re late.
Take out a small business loan – a short term loan, that is quick and easy to access, will help your business take on a new profitable project or cover unexpected expenses.
Have a rainy day fund – always maintain a cash reserve of at least three months’ worth of expenses. This helps you get through the quieter months and to deal with unforeseen large expenses such as equipment breakages.