Kudzai M. Mubaiwa
Most small business will at some point in their operational life experience cashflow issues. Money is important for two stages of a business — starting out where you will require capital at inception for capital expenditure such as machinery, equipment, vehicles, furniture and fittings — as well as day to day operations where you will need working capital to oil recurrent activities and expenses such as stocking, office expenses, salaries, paying for utilities, business development and other short-term payments for goods and services used in no longer than 12 months.
Working capital is often strained and this is especially difficult when you cannot accurately forecast when you will receive payments due to you by clients, or how much you can sell in product or services.
In such instances you will need strategies to ease the burden of operations and managing the risk of late payments or defaults that directly impact your cashflow. Here are a few examples that you can employ in isolation or as a combination:
Request for a deposit that (at least) covers your break-even point. If your business requires a significant capital or cash outlay in the case of goods, or substantial effort in the case of services, ask your clients to pay something upfront.
This will ensure that all your free cash is not tied up in one project or one order for a single client at the expense of serving others. Most clients will be amenable to paying something in advance as a commitment, even if it is not all, and you are better off than waiting for one huge payment that comes in late.
Make it easy and worthwhile for customers to pay faster. The easiest way is to offer discounts that match time periods — for example a 10 percent discount for advance payments, 5 percent for payment within 10 days and full payment remains due in 30 days.
Your customers are often persons or entities that enjoy making a saving and may take you up on the offer so that they too manage their cashflow by minimising the quantum of outflows.
Delay paying for expenses. This can be an extreme sport and requires a strong heart and fortitude. Identify the bills you have the greatest control over and delay paying them as much as possible until that critical moment when the creditors are about to escalate.
The days or weeks of delay are quite important in the long run as they buy you time while you wait for your debtors to make good.
Many service providers for utilities may have a cycle that allows you to continue to utilise service even when you are overdue, leverage that until your cash comes in. Tied to this is directly asking for longer payment terms with your suppliers. The idea is to have either terms that match the time your creditors take to pay you, or better yet, favourable terms that allow you to pay in a period longer than the one your clients will settle with you, a mismatch in your favour. Nothing on this earth cannot be negotiated, give it a shot then make sure you always settle when due.
Increase margins to enable you to make more cash than actually required. This is a subtle way of managing clients that do take up huge orders but are difficult when it comes time to pay. You would have to either really manage your input costs or raise your charges — or both if you can pull it off.
That means whenever you are paid you have enough to continue as a going concern and more whilst you wait for other payments to come through. This works best when your product or service is one that is unique, has strong demand, or is completely unavailable from competitors due to your value proposition.
It is a sensitive move that must be done with care as you risk losing customers altogether, but it may also retain you only quality clients that appreciate and pay.
Manage the flow of business where you can. See if you can agree with a client on the timing of orders especially those that require a huge outlay. Try and line up in such a way that you do the work that gives you consistent cash first and then do the consuming orders afterwards.
Consulting companies for example, can defer some engagements to a later period by indicating that they are tied up presently. Trying to do many things at once can result in poor performance and this too would impact cashflow as clients would refuse to pay for a shoddy product or service.
A classic example is in hairdressing where if you become greedy you will pack in many clients in a day but their hairdos may be substandard and they may contest the full fee.
You are better off running an appointment based business that guarantees great quality and can easily collect.
Develop a thick skin when it comes to collections. In this Zimbabwe you cannot afford to lose heart when due payments are delayed. Pursue them diligently and consistently until you receive what is yours.
Cut down on what you can when payments are delayed. Consider selling off any machinery or equipment you may have that is growing idle or is getting obsolete whilst you still can. Also consider selling invoices/future revenues if you have delivered but cash is locked up until payment. A funding provider would advance you your dues less a benefit to them.
Also develop strong relationships with your local bank for as they see your flows over time, they can be able to assist with order financing or a rolling overdraft type facility if your business margins can support it.
Cash flow is the blood, the life of a business. You may have a body but if the blood does not flow you are as good as dead.
Working capital is indeed the fuel for small businesses, without it they cannot power through. Managing cash flow is one of the most critical activities for the business owner. Employ these strategies and watch your business improve and thrive this year!
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