the sme guide to cash flow management
TRANSCRIPT
The SME Guide to Cash Flow Management
Practical guidance on building and maintaining a healthy cash flow
Contents1. What is the Business High Five?2. The Importance of Cash Flow
Management3. 7 Ways to Manage your Business
Cash Flow4. 8 Cost-reduction Strategies for
Better Cash Flow5. Forecasting in Uncertain Times6. Frequently Asked Questions
Running your own business can be one of the most challenging and rewarding things you ever do. As big supporters of SMEs, we’re working with a few of our friends in the business to share some valuable insights every business owner should know about accounting, customer relations, marketing, legal, HR, tech, and more.
It’s not formal advice, just some practical pointers on running a healthy business. Always make sure you get the right advice for your situation. That said, whether you operate a courier service or sell cupcakes, we hope the Lulalend Business High Five helps keep your business on the move and making some ka-ching!
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What is the Business High Five?
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Cash Flow Management is the process of monitoring, analysing, andoptimizing the net amount of cash receipts minus the cash expenses. As a business owner, understanding your cash flow gives you clarity over your monthly cash needs, and can also help identify the sources from where these can be met.
Cash flow management involves the following:
• Knowing when, where, and how your cash needs will occur• Knowing the best sources for meeting additional cash needs, and• Being prepared to meet these needs when they occur, by keeping good
relationships with the debtors and creditors.
The Importance of Cash Flow Management
If you are looking to make a positive impact on your cash flow management, here are some points to consider:
1. Studying the past trends of cash inflows and outflows is a basis for cash budgeting.
2. Maintaining up-to-date records like a sales and purchase register, a debtors-creditors register and cash book are essential for cash flow management.
3. Funds raised for a specific purpose should be utilised for the same purpose.
4. Timely recovery of receivables is one of the important aspects of cash flow management.
5. Timely payment of outstanding dues helps avoid overdue interest liability and maintains creditworthiness.
6. Surplus cash must not be kept idle but should be invested properly, considering the risk & returns.
7. An increase in profit does not necessarily mean more cash on hand. Profit is the amount of money the organization earns over a given period of time, while cash is what it has on hand to keep the business running.
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7 Ways to Manage your Business’s Cash Flow
Having an effective cash flow system is the heartbeat of any successful business. This is especially true in a business where managing cash flow between different projects can mean the difference between success and failure of your business.We’ve put together a few tips and tricks that could help you manage your cash flow to ensure your business remains profitable across all projects.
Understand your customer
As a business owner, it is always ideal to work with contractors and customers who know how to process your paperwork, provide approval on work completed, and pay for services soon after completion. Knowing your customer’s creditworthiness by reviewing their financial statements or annual fiscal reports can help you understand how they have worked in the past and guide you on how to manage your relationship with them. It is important to know that they will be able to pay for the work you complete for them, even before you begin.
Do a Cash Flow Forecast
Create a reasonable cash flow forecast for each of your projects. Depending on the length of the project, plan out how much work will be completed each week or month and how much you can invoice for. Remember to consider how much you are set to pay vendors so you have an estimated idea of how much cash you will have at every stage during your project. At the end of each project, compare your forecast against your receipts so you can improve future forecasts and in turn better manage your cash flow.
Be realistic about your profit estimates
You should never consider taking on a new project that will not be profitable for your business. Managing your cash flow on profitable projects is difficult enough. You should avoid moving funds from one project to pay for another just to keep an unprofitable project going.
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Negotiate contract terms in your favour
It is important to ensure that the payment terms you agree on are in your company’s best interest. The invoicing schedule you should prefer is one that reflects upfront costs that set the project in motion, such as being paid for materials when they are delivered rather than when they have been installed. Come up with a schedule that works for you and your vendors so both parties have an understanding and you can avoid having disputes about money and payment terms throughout the project.
Always check Change Orders
Change orders can have a big impact on your cash flow so it’s important to know what you can and can’t charge for. Change orders should be clearly established in the contract. Keeping on top of and documenting the extra work completed is essential.
Be strict about collecting payments
It is always good to have your accounts receivable down to 40 days or less, however, this may not always be the case. When invoicing customers, ensure you have all the correct and necessary documentation and that you are submitting it to the relevant people so you can avoid delayed payments. Do not be shy when requesting payment against an agreed contract.
Close the Project
Closing a project and collecting payment can be tricky at times. Effectively managing the final punch list can improve the timeliness of the final payment. Finance management tools that allow you to offer terms to your customers, like Lulapay, can allow you to collect payment upfront while still offering your debtors payment terms with the finance provider.
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8 Cost-reduction Strategies for Better Cash Flow
As a business owner, you’re always looking for ways to reduce costs.Of course, cutting costs helps you boost your cash flow. And when you’re running a business, you know cash flow matters. Business owners regularly tell us that a steady cash flow means their businesses can thrive. Negative cash flow, on the other hand, causes missed opportunities and immense personal stress.
The good news: there are quick steps to improve your cash flow and reduce your costs; simple strategies you can start using right away.
Lulalend’s team of accounting and finance experts share below some practical tips to help you take control of your cash flow and better manage your business finances.
1. Review your business finances
Improving your cash flow management begins with an understanding of your business finances.
Evaluate your expenses and ask:• Do I need all of these services?• Are there cheaper alternatives?
Carvin Gordon, Lulalend’s Financial Accountant, says: “Review your monthly expenses and negotiate with institutions for a possible reduction in costs, such as insurance, for example. Insurance institutions are always willing to negotiate better rates.” Another option is to consolidate policies or accounts.
Study retainer or consultant fees as well, added Quentin Daniel, Lulalend’s Head of Finance. “You might find you’re not using—or getting any real business value—from these services’’.
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2. Always ask for supplier discounts
Getting a great deal on your supplies makes a massive difference to your bottom line. By asking for supplier discounts, you can quickly reduce your costs, said Daniel.
Many suppliers will have a lower per-unit price the more you buy, and others offer early payment discounts. Ask your supplier if you’re not sure. If you’re a long-time buyer, your vendor is more likely to consider offering you a discount even if it’s not explicitly stated. Even if these savings appear small, they’ll add up in the long term.
3. Don’t overstock
Buying in bulk can help you cut costs…but that’s not always the case. You could also end up losing money, said Bernice du Toit, Financial Accountant at Lulalend. “Some companies tend to over-stock on inventory, not taking into account the storage cost of these goods or the possibility that stock may go obsolete.”
Du Toit says, “Inventory is also tied-up cash flow that could have potentially been used more effectively in a different manner. Businesses should try to keep as little stock on hand and only bulk order if a discount is offered and the entity is sure that goods will be sold.”
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4. Compare quotes
When you’re shopping for a new supplier, compare quotes. Putting in the time to do a price comparison might get you a better deal. Once you receive your invoice, compare it against your initial quote, said Daniel. “Always double-check invoices from suppliers and price of quote vs billing. Always question items(for clarity).”
5. Save on your business finance
Another way to reduce costs is to be strategic in your approach to business finance. You might consider funding to boost your cash flow. But if you want to pay back the loan early, it might end up costing you more. Some funders charge hefty early repayment penalties. Look for business funding options that allow you to settle early, free of charge.
6. Reduce advertising costs
As an SME, you might not have a huge advertising budget. Fortunately, you don’t need one to reach your customers.
Here are some tips small business marketing tips:• Clearly define your target audience• Understand their pain points• Create content and offers that address those pain points• Consider a Facebook marketing plan; you’ll get detailed targeting at
affordable rates• Build your own email list
Remember to focus your marketing efforts on your ideal customers to get the best results. For more on marketing tips, check out our series here.
Probably one of the most effective ways to drum up new business is by keeping your existing customers happy, adds Gordon.“Business owners should focus on quality over quantity. A lot of the time you push to get jobs done at the expense of quality. Quality will ensure repeat customers, brand building, and word-of-mouth referrals.”
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7. Embrace technology and automation
There’s some truth to the old saying, “Time is money.” This is especially relevant for SMEs. Consider how much time you and your team spend doing manual, repetitive tasks. Try cloud applications to save time on routine tasks, • Social Media scheduling, using Buffer or Hootsuite• Document management and signatures, with
applications like Docusign• Accounting, using Quickbooks or Xero
By using technology, you’ll free up more time for meaningful work; the kind of work that will add real value to your business. And though we’re big believers in the power of these kinds of applications, only pay for what you use. “Review annual subscriptions that you don’t use, i.e., you’ve been dragged into subscribing for software but don’t actually use it,” added Daniel.
8. Pay your taxes on time
Many business owners dread tax season. On average, each South African business spends R63 328 and 255 hours annually complying with tax regulations, according to research. Still, when it comes to your tax, pay the right amount, on time. Failure to pay your taxes on time may deem you liable for penalties. The current penalties may range from R250 up to R16 000 a month for each month that the non-compliance continues.
e.g.:
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Forecasting in Uncertain Times
It’s easy to get stuck in a loop of short-term thinking when you’re dealing with sudden, unexpected, even – dare we say it? – unprecedented events. But forward planning is key because it helps you adapt more quickly as the situation evolves so you come out the other side in a stronger position.Of course, forecasting in the midst of great economic uncertainty can feel like trying to hit a moving target. That is why it’s a good idea to plan for a number of different scenarios.
Deloitte’s Dwight Allen, Frank Friedman, and Carl Steidtmann suggest a four-step process:
Your choice of scenarios will depend on what you want to forecast. Let’s say you’re trying to work out an operational budget for 2021. You could come up with two scenarios.In scenario 1 – medical research is successful and a vaccine becomes widely available in September 2021.In scenario 2 – the Covid-19 pandemic escalates and lockdown remains in force, so no travel or in-person meetings are possible until at least 2022.
With your scenarios in place, you’d try to estimate the potential financial impact on your business. Covid-19’s effect on certain countries or industries, for instance, could have repercussions on your supply chain and, in turn, on your profit margin. Similarly, an ongoing travel ban might have a positive effect on your T&E spend. But at the same time, it may hamper growth if you’re dependent on in-person meetings to grow.
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You now know the potential financial impact each scenario could have on your business.
• What steps can you take to minimise that impact or neutralise it?
• And how much would each action cost the company?
These steps can act as a framework the leadership team can use to make business decisions moving forward. So, for instance, if no travel is going to be possible until at least 2022, you may need to invest in software and training to make sales demos remotely.
The accuracy of your forecasts depends on many factors. Some, like your data and processes, are within your control. But others – specifically, how things will actually play out compared to the scenarios you planned for – aren’t.
With this in mind, continuous monitoring is key.You’ll need to track the situation closely to understand how you’re spending and the effect this could have on your ability to respond to changes down the line.
If you would like to learn more about Lulalend’s business funding for SMEs visit www.lulalend.co.za, or contact us on 087 943 2381, and one of our funding specialists will be happy to answer your questions.
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More about Lulalend
You get a decision in minutes, our costs are transparent and we require no collateral. Applying for finance from Lulalend takes place completely online. Our scoring technology evaluates the real-time performance of your business so that you get the best possible funding.
We’re passionate about helping SMEs grow, that’s why when you receive funding from us for the first time, you’ll only start repaying in 60 days. That’s two months of cost-free capital.* Enter promo code LULA when applying to qualify.
*Only if the full loan amount is repaid after 30 days of the 60 day period will any charges accrue. Offer applies to first time advances only.
