Running a small business comes with its unique set of challenges. The business promoters are saddled with the responsibility of ensuring their businesses navigate several murky waters to remain afloat. From managing staff inefficiencies to revamping flawed operating workflow. From improving on product offerings to meeting customer changing expectations. From providing basic infrastructures (which is the ordinary responsibility of the government) to managing the unbridled hike in production costs. Small business owners wear different hats and this makes them special. The incontrovertible truth is that business owners in this part of the world are solving a whole lot of problems and for this they must be supported by political leaders in the area of implementing economic policies that will create enabling operating environment.
In my 14 years of dealing with small business owners, I can mention tons of challenges which business owners face, from systemic to non-systemic problems. But one problem that stands out from this avalanche of problems is poor cashflow management. Irrespective of the size, nature or age of a business, cash remains its lifeblood and one single most critical success factor for all business. If you want to kill a business quickly, just starve it of cash. Thus, a business’ going concern is a function of its ability to remain liquid.
In simple terms, cashflow is the movement of money in and out of a business. It is the interplay of a business’ cash inflow through cash receipt from sales, payment received from trade debtors, income from sale of moribund assets, new capital injection etc. and the outflows through payment of wages, purchases of raw materials, payment to suppliers, acquisition of fixed assets etc. Small business owners must be intentional about the way they manage the movement of cash within their businesses.
5 Tips for optimizing your business’ cashflow:
1. Prepare accurate cashflow forecasting:
Small business owners must cultivate the habit of creating a realistic cashflow forecast. A cashflow forecast will anticipate your income and expenses within a period, say one month, and will clearly show if there is a potential gap in your cashflow that needs to be blocked using external capital. A realistic forecast will help you plan ahead through a more efficient allocation of resources. Sticking to your cashflow forecast will help you achieve better financial discipline in your business as you will know expenses that should be avoided within the period.
2. Ensure prompt invoicing:
Most small businesses lack the financial muscle to employ qualified Accountants to handle critical accounting responsibilities in their businesses. As a result, many small business owners find themselves directly involved in invoicing customers after credit sales are made. For more structured small businesses, a junior, inexperienced staff will be responsible for the invoicing duty.
Invoicing is a critical activity which all businesses, particularly the ones that make credit sales, must take very seriously. Staying on top of invoices is a vital component of the day to day running a business. Customers must be invoiced once sales are made so that payment days can start counting immediately. Imagine submitting an invoice after 5days of supply when you have agreed 30days payment days with a customer. Ordinarily, the invoice days will start counting from the day you officially submit your invoice and not from the date you made the supply. As such, instead of 30days waiting period, you will have to wait for additional 5 days before you receive payment due to the delay in submission of the sales invoice. Unfortunately, most “big” clients often capitalise on this lapse as basis for delaying payment to the small businesses.
Within their available resources, small business owners should endeavour to put a proper structure in place that will ensure invoices are not just submitted promptly, but tracked until payments are received. The staff in charge of invoices must keep track of due dates of every invoice and ensure they follow up with the customers few days ahead of the invoice due date.
The popular small business accounting software such as Sage Accounting, Quickbook, Xeros etc. have robust invoicing features. However, businesses without accounting software can take advantage of invoicing apps that can help them organize their invoicing activities. Some of these apps include: Invoiced, FreeAgent, Invoice2Go, Wave, Zoho Invoice and a host of other easy to use apps.
3. Leverage on supplier credits:
One of the cheapest sources of working capital for businesses is supplier credit. Simply put, supplier credit is a type of commercial financing in which a business is allowed to purchase goods from its suppliers on credit with an agreement to pay at a later date. Small businesses should endeavour to build good relationship with their suppliers so that the later can trust them with credit sales. Supplier credit will reduce your cash conversion cycle, a metric expressing how many days it takes your business to convert the cash it spends on inventory back into cash after product sales.
I will also like to emphasise here that supplier credit thrives on relationship. Business owners should ensure they maintain very cordial and mutually beneficial relationship with their suppliers in order to optimise this financing option for their business. They should avoid taking advantage of the suppliers’ gesture by delaying payment arbitrarily.
Major businesses in the retail/consumer goods industry leverage on supplier credit. FMCGs, Supermarkets, groceries stores, pharmacies etc. leverage on supplier credits as their primary source of financing their working capital. While almost 100% of their sales are on cash basis, most of their purchases are done on credit. This makes them to have a negative cash conversion cycle (A situation where they hold supplier’s payment for many days after they have sold to their customers in cash) This is a proven financing strategy and small businesses should take advantage of it as well.
4. Avoid diversion of working capital
Due to poor knowledge of financial management, small businesses make costly mistakes of using their working capital for purposes other than day to day running of their businesses. I have seen instances where business owners invest in assets such as landed property or automobile using their working capital. While they assume a feeling of personal achievement having acquired the coveted asset, they put unnecessary pressure on the business. The effect of diversion of working capital into purposes which are not related to day to day running of the business will create a gap in the smooth operations of the business.
Small businesses owners must be disciplined enough to ensure that they do not use their working capital for non-operating purposes. Companies grow their business through fixed assets investment. However, such growth is not expected to be financed by their working capital. It is advisable to fund business expansion through cash reserve from retained earnings or fresh capital injection in the form of equity and debt.
A business working capital is its defensive capital. It is that fund that must continue to be recycled within the business to optimise its operations. Business owners must do everything to ensure that this capital remains in the business in the form of cash, inventory or receivable.
5. Retain your earnings
The common objective of all businesses is profitability. Entrepreneurs set up their businesses to make profit. The part of the business profit that is ploughed back into the business in a particular period is the retained earnings. Retained earnings is the part of the profit which is not taken away from the business in the form of owner’s drawing or dividend pay-out.
As much as possible, businesses leaders should endeavour to retain some part of their profit in the business. Retained earnings is the best type of capital for running a business as it represents the capital that is self-generated by the business. With retained earnings, a business will be able to grow organically.
Retained earnings can be deployed to boost working capital as well as support in business expansion. A growing reserve of a business through retained earnings is a strong sign of a thriving business.
Written by Sola Adeyiga
Chief Executive Officer,
CreditPRO Business Support Services Limited.
