Think deep sea diving, where breathing does not come naturally. It has to be planned, thought about and consciously practiced if you want to survive, says David Morobe, regional general manager at Business Partners Limited (BUSINESS/PARTNERS).
He lists the crucial habits that business owners have to cultivate to make their businesses breath the cash that they need to survive:
1. Plan your cash flow
A healthy business has a cash-flow projection that stretches at least a year ahead. Of course the chances are slim that the actual accounts will be the same as those you project twelve months from now, but the exercise is crucial to help you anticipate slow and fast seasons. Focus on the next three month and constantly make sure that the money coming in and flowing out is roughly the same as your projections. React immediately to any variance to make sure that you don’t run out of cash, and keep your projections updated.
2. Make sure your business is profitable
The best cash-flow management in the world won’t help you if your business does not make more money than it spends. Analyse each product and service that you offer separately to check if each of them brings in enough revenue. Make sure that you are familiar with the concepts of gross profit and break-even, and that you can apply them in your business.
3. Manage your debtors
Invoice as quickly as possible and keep your debtors strictly to their payment terms. Vet your customers before you extend credit and limit your exposure to any one client. Negotiating upfront or progress payments and deposits are all ways in which you can improve your cash-flow position.
4. Cut costs where you can and be frugal
Business expenses drift upwards if they are not regularly reviewed and kept in check. It requires lots of thought, though. Some marketing expenses, for example, can feel wasteful, but are actually essential to increase sales. On the other hand, some investments can feel essential but are actually just vanity projects, for example having a custom-made website built when an off-the-shelf one will do.
5. Be smart with debt
Before taking on any new debt, make sure it is affordable and that you really need it. Apply the fundamental principle that long-term assets should be financed by long-term debt so that your working capital does not get sucked up into major purchases. And watch out for the small debts as well - credit cards can be very expensive if they are not managed well.
Debt applied for and negotiated well in advance of when you need it is almost always more readily available and cheaper than the emergency finance. As soon as your cash flow projections show the possibility of a cash shortfall ahead, start making plans to raise finance.
6. Liquidate obsolete assets
Look for opportunities to clear your yard, workshop or shelves of your old machines or slow-moving stock. It will bring in cash that can be applied productively, and lessen the clutter in your business.
7. Negotiate better terms with your creditors
Shop around for suppliers who are willing to sell to you on credit or offer you more favourable payment terms. The longer your can postpone your expenses, the better for your cash-flow situation, but make sure that you stick to the agreed terms so that your suppliers are willing to extend credit when your future growth requires it.
8. Build up reserves
As difficult as it is for a growing businesses to put aside reserves, it is crucial for the survival of a business to build up a cash buffer. Ideally, you should have three months’ worth of expenses stashed away in case of a business shock.
9. Manage VAT carefully
The recent rise of the VAT rate to 15% means VAT registered businesses will be receiving more cash from their clients on behalf of the taxman. Resist the temptation to dip into the VAT money that you actually owe the Receiver - the penalties for late VAT payments will make it some of the most expensive finance around.