Six common cash flow issues and how to avoid them

By Simon Paterson, Partner at Surrey accountants, RJP LLP

Managing cash flow is one of the biggest challenges a small business owner has to overcome. It is the reason why many sound businesses often fail. They have a fantastic product or service, but cash flow problems and an inability to raise the finance they need in the short term can mean they cannot meet their liabilities and hence they fail. According to recent US research, it is the reason why 82% of small companies fail.

Understanding how to manage cash flow effectively and keep things running smoothly is absolutely essential for every business owner, whether you are a sole trader, partnership or limited company. Here are 6 common challenges a company can face when it comes to managing their cash flow with practical advice on how to overcome them.

  1. Paying staff salaries on a weekly basis

In some industries, it is considered the norm to pay staff on a weekly or fortnightly basis. This is common in the construction and hospitality industries but the downside is it results in cash having to be found on a weekly basis, which means a constant drain to cash flow levels. It is especially problematic when staff are being paid weekly and yet customers are on 30 days or more payment terms. Moving staff to monthly payments will ease the cash flow burden.

  1. Poor credit control function results in customers paying too slowly

Customers paying too slowly is a big reason why businesses can struggle with cash flow. Having a good credit control function in place, which ensures that income is received on a regular basis and within credit terms, is absolutely essential. Consider having a dedicated person to take care of credit control or outsource it to a specialist.

Start off by making sure the customer gets the invoice in the first place, so there are no excuses. Then follow up again just before the invoice due date, to ensure that if there are potentially going to be delays, you can plan ahead for them. In the majority of cases, if customers know you expect prompt payment as the norm, they will get into good habits from the outset.

  1. Over trading of the company

Whilst increasing turnover is important, it should not be to the detriment of cash flow. In many instances a business will chase turnover but if the business is incurring costs up front and payment is not received until a significant period after then the bigger the turnover gets then the bigger the cash flow deficit will become. Where possible try and get out of pocket expenses paid at the start of a project.

When growing a business you need to plan ahead and ensure you have access to cash flow boosting facilities such as a bank overdraft. Another good option is to use invoice discounting facilities, which allows you to draw down on revenues due to you in advance of being paid by the customer.

If you need to hold stock within your business then you make look to a stock finance facility which again can improve the cash position of the business whilst at the same time holding the stock.

  1. Buying capital equipment outright unnecessarily

It can be tempting to buy assets outright if you happen to have the funds available at the time. However, it is not always wise and may be more beneficial to use a funding facility such as hire purchase or bank loan. For instance, if you are looking to buy computer equipment for your business it can be a hefty one off outlay. Spreading the payments over 2-3 years will greatly assist the cash position of the company.

  1. Minimise expenses and overheads

Where possible, try and keep fixed overheads to a minimum. This then gives you flexibility as you grow and means you can adapt to a changing market. For example use outsourced services for HR, accounting etc. rather than having dedicated staff which is then a fixed cost you are committed to. Having costs which are of a more variable nature means you can dip in and out of them as you need them.

  1. Under-pricing for your products and services

When you first start out in business or in order to attract a client, it can be tempting to under price for a job or service. Short term, it might be helpful to secure some business but this creates problems in the longer term. For starters, it means your client will get used to paying less and it makes it harder to increase prices later on. It also devalues what you do, the client may be less likely to really appreciate the work because they see you as a ‘cheap supplier’, and it can create resentment in the long term.

It is far better to price yourself accurately and if the customer is unwilling to pay, walk away. If you quote a fair price it is probable they won’t get better elsewhere and are likely to realise this and return. And from a cash flow point of view, under-pricing means lower profits and the lower the levels of cash you will ultimately generate.

Cash flow is the lifeblood of a business but it is a balancing act. The trick to managing cash flow well is to take a multi-pronged approach and seek improvements to a range of different things. Work on the principle of marginal gains. Small improvements made consistently will result in a big improvement over time, and you won’t look back.

Source: SME Web

Tips for Small Businesses to Survive Fuel Price Hikes

Petrol now costs 82 cents more per litre since 6 June, as confirmed by the Energy Department last week. This follows the VAT increase by one percentage point to 15% that took effect from 1 April.

For small businesses in South Africa, these additional costs are crippling and extremely tight financial controls are required to survive.

“The reality is that fuel hikes have a negative impact on most businesses because every tangible product which needs to be moved from point A to B needs to be transported and therefore, incurs these extra costs. Service providers will also need to take increased transport costs into account,” says Jannie Rossouw, Head: Sanlam Business Market.

Given that the SME sector is estimated to represent almost 40% of business in South Africa and is also a key employer, the mounting financial pressure felt by business owners should be of concern to everyone. There are also certain industries that are more at risk.

“Agriculture, infrastructure and construction, manufacturing and mining, travel and tourism, retail and wholesale trade, transportation and aviation will likely be most affected,” says Rossouw.

Having a clear view on business finances and implementing conservative measures can help protect business owners from rising fuel levies. Reducing all costs by 10% as a blanket approach is worth considering and Rossouw suggests the following additional tips:

  • Examine your business expenses to trim any unnecessary costs
  • Review your pricing strategy (align with market or choose a niche target market which is not as price-sensitive)
  • Consider doing away with any discounting
  • Appoint a commission-only sales team
  • Reconsider how to restructure overtime pay
  • “Right size” your staff complement
  • Consider how you could decrease employees’ working hours by implementing a ‘2/3 shift policy’
  • Set monthly expenditure budgets and monitor these
  • Decrease your debtor’s terms

Source: SME South Africa

South Africa falls off the map

South Africa has dropped off the investment radar of firms and business people. It is a dark reality that a few investment lions are not going to fix.

About seven years ago I was phoned by agents who arrange for their clients to talk to researchers in a country they are interested in investing. The money was good, and as I knew the South African economy quite well, the conference calls became quite an income for my business.

Then one agent asked if I could talk about Angola and Nigeria instead of South Africa, but I felt I did not know enough so recommended someone else. Another agent asked about Angola too and later about a host of other African countries.

I asked the agent what about South Africa, and she simply said no one is interested in South Africa at the moment, it has dropped off the horizon. Another agent a while later confirmed that their clients no longer think that South Africa is an investment destination.

“Our surveys show that clients don’t want to know about South Africa; it attracts no attention anymore.”

International surveys show the same sorry state with three international surveys indicating how SA has dropped from the 28th highest ranked country in the WEF global ranking to 61st in 2017. The IMD Global Ranking has SA dropping to 53rd from 37th out of 63 countries. In ten years.

The World Bank Doing Business index has seen SA drop from 28th place to 82nd place in a decade.

I’ve heard the tragically misinformed talk show academics trash these surveys as biased; the hard evidence has come in the form of actual investments.

The massive jump to the left in 2007 by the ANC and the corruption right at the top of the country has destroyed investment and at least a million jobs if not three or four million jobs.

Hard evidence also shows SA may have lost three million jobs.

Net foreign direct investment is the difference between South African companies investing abroad and foreign countries investing here. If it is negative, it means that more South African firms are investing elsewhere than foreign firms are investing here.

Expressed as a percentage of GDP shows that it reached 24% of GDP in 2005 and the low was at the end of 2017 when the net FDI was 31% as a percentage of GDP.

In money terms, SA firms had fixed investments of R3.3 trillion in other countries while the world had fixed investments of R1.8 trillion. SA was therefore R1.5 trillion more invested in the world outside of SA than the world invested here.

The surveys gave SA warnings that investors took note of low growth; crime; corruption and extremely bad attitudes to business.

In today’s terms, we have gone R1.2 trillion net positive FDI to negative R1.5 trillion a net loss in fixed investment of R2.7 trillion!

At the cost of say R1 million to create a job that would mean SA has lost 2.7 million jobs! I know it not that simple as one needs other factors such as quality education and business confidence in place.

Also, jobs can cost much more or less than R1 million, but the government has control over many things such as the quality of education and attitude towards business and fighting corruption.

Almost all other emerging markets are improving the ease of doing business. Many African countries are now surpassing South Africa in the ease of doing business. Rwanda; Morocco; Kenya and Botswana are all ranked higher than South Africa in 2018. Zambia and Tunisia are not that far behind while Malawi improved the most of all the countries in the rankings.

The top 25 developing countries in the world average over 30% positive net FDI to GDP (excluding SA and Malaysia who are the only two with negative net FDI in the largest developing markets). In South African terms today that would mean an extra R3 trillion in fixed investment in South Africa today.

That would probably mean around 3 million more jobs and the knock-on effect of that perhaps another million or two.

The recent World Bank report also estimates that for every 1% reduction in the unemployment rate the inequality measure the Gini coefficient would drop by 1.2 points. Three million jobs would have halved the unemployment rate from about 27% to about 13%.

The SA Gini would have dropped from 0.69 to 0.52 on these estimates. That would have really taken most of the poverty and inequality problems away. If these three million estimated jobs could have had a knock-on impact of only 700 000 other jobs then SA unemployment would be in single digits.

Cyril Ramaphosa: A good start but the real hard work is on the way

Again it’s not that easy but it is possible and it shows how the declines of governance; returns and downright foolish policies have contributed to poverty in South Africa. The risk/reward ratio has changed completely from very positive during the Mandela and early Mbeki years to less rewarding and far more risky in recent times.

If South Africa just improved slightly, it would make a difference and certainly the improvement in business confidence, and consumer confidence are a good start.

But the real hard work has not yet begun. Spending tax money more wisely; jailing corrupt leaders; reducing the toxic racial atmosphere; easing regulations and closing state enterprises that require tax money year after year.

Lowering the cost of transport; communications; water and electricity while fixing roads, and infrastructure are minimum requirements. Put more business people on all commissions and reduce the academics and civil servants so that the knowledge base is widened.

Cutting the civil service wage bill by at least third when expressed as a percentage of GDP. This must happen while we lower the number of children to educator to the world average of 24 from 32 now.

Lower the tax burden and make far more business-friendly policies the centrepiece of all laws. You are not putting people first if you do not attract investments and therefore jobs and food on the plate. After that you can worry about minimum wages or if a business is the right colour.

– By Mike Schussler

Mike Schussler is an economist at

Source: Money Web

The journey so far: Ivan Mbowa, CEO, Umati Capital

Ivan Mbowa is the co-founder and CEO of Umati Capital, a Kenyan-based financial institution that provides credit and related payment technologies to agri-business supply chains, retailer value chains and fast-moving consumer goods manufacturers.

1. Tell us about one of the toughest situations you’ve found yourself in as a business owner.

One of the toughest situations that I faced in the early days of our lending business was having to make a sudden provision for loss on 90% of our loan book after discovering systemic customer-driven fraud.

As you can imagine, this led to a catalytic shutdown of debt funding lines, equity investor interest and key staff departures.

I would like to tell you that I immediately knew what to do, but I would be lying. I spent weeks like a deer in  headlights, questioning everything. This was the proverbial lowest of lows. However, one of the things I learned was that it is precisely at times like this that you discover who you truly are in the face of a devastating crisis.

To overcome this situation, I began the slow journey of literally rebuilding the business by quickly admitting where we went wrong, putting in place the right controls and processes, painting a new vision for the future and (painfully) trying to convince my investors and remaining staff to give us a second chance.

Now almost three years later, we are out of the woods and have grown loan volumes six times with a fraction of the bad debt (and having almost completed the full recovery of the 90% of the loan book that we wrote off).

2. Which business achievement are you most proud of?

I am most proud that five years after having started and against the odds, our startup is thriving after having been tested through existential crises.

A friend once told me that in the early days, running a startup is a game of attrition: in a game where 90% of your competition won’t be alive within three years of starting, to survive is to win.

On a more conventional basis, I would also add that I am proud of being able to transform a concept into a business, raising significant capital, recruiting an amazing team and proving that you could create a digital lending business that would seek to provide small businesses with access to uncollateralised working capital that could change their business fortunes. This is in an economy where the majority of banks have failed to provide accessible finance to small businesses.

3. Describe your greatest weakness as an entrepreneur.

One of my greatest weaknesses is conversely one of my greatest strengths. This is the ability to apply a laser-like focus to getting things done against the face of criticism or lack of faith in those around me.

This, of course, sounds like a great strength until you realise that this has also led to being less than quick to adjust course in business when the situation called for radical change in an opposite direction. I have prevented this from negatively impacting my company by having greater self-awareness [and] the guiding hand of a board of directors who ultimately form both a sounding board and an approval layer around strategic direction.

4. Which popular entrepreneurial advice do you disagree with?

I disagree with the conventional business wisdom that it is better to copy well than [to] invent badly.

You see this in a lot of markets in Africa, where a successful business concept is instantly replicated and true innovation is occasionally looked down upon.

My personal philosophy (borrowed heavily from Daniel Pink’s book “Drive”) is that I am only driven by work that is challenging, purposeful and that allows me a chance at self-mastery. Spending the better part of my years replicating the work of others would be a waste of my intellect and life.

5. Is there anything you wish you knew about entrepreneurship before you got started?

I wish I had known some of the greatest challenges in entrepreneurship would come from within and not outside of myself. The battle is truly won or lost in your mind.

Entrepreneurs are the mad ones among us who leave certainty for a chance at the improbable. Life will continuously remind you that you are playing against the odds. The moment you give up mentally, it becomes a self-fulfilling prophecy.

Finally, as another friend told me at the beginning of my own entrepreneurial journey: there are two types of businesspeople in Africa – visionaries and hustlers. So choose your tribe and don’t waste your time trying to play by the rules of the other group.

Source: How We Made It In Africa

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