South Africa is in a tight corner economically. Not only are we in an official recession, but we get bombarded daily with stories of political mischief, state capture and massive fraud. As business owners we are shell shocked, carrying on about our normal course of business with trepidation. The best action to take is to know exactly where you stand at all times. Here are some key ways to assist in beating the recession:
Understand your balance sheet
This may sound obvious, but many owners focus on their business’ trading accounts alone. It’s a potentially fatal mistake because healthy profits can mask an impending cash flow crisis. Trading accounts don’t usually contain the information required to make an adequate cash flow projection. For that, you’re going to need a structured balance sheet that includes all the influencing factors including current liabilities, current assets, inventory and so on. This is the basis for your cash flow projection which represents an “educated guess” at the likely incomings and outgoings over the period you have selected to map out.
Review and update cash flow budgets regularly
It’s your best insurance against potential cash shortages. If your business has a predictable cash flow, then cash flow budgeting on a quarterly basis is often enough. The rule of thumb is that the greater the cash flow uncertainty a business faces, the more often a cash flow budget should be prepared.
Get payments in quickly
Master the art of debtor management. Let debtors know how much time remains before due dates. Stay in close contact with major debtors as payment deadlines approach. Offer small discounts for early payment as an incentive.
Pay your creditors strategically
Take advantage of credit terms and prioritise payments according to the consequences involved in going overdue. Wages, taxes and direct debits are at the top of the list for on-time payment; key suppliers may be prepared to wait a while to keep your business. Don’t pay early just to get a discounted price unless getting the discount is better than being without the cash.
Get finance products working to your benefit
Overdrafts, medium term loans, lease facilities and cash flow funding products can all be excellent tools to help match a business’ cash supply with planned outlays. Even the business credit card can be a good way to ease the squeeze as long as you are sure the debt can be paid before interest kicks in.
Review your fixed overhead
Go through your fixed overheads line by line and determine those costs you can do without.
While many of these tips are obvious, all too often we slip into a comfort zone and take our “eye off the ball.” Why not give us a call to setup a strategy to help improve your cash management?