One of the paradoxes of owner-managed businesses is that the risk of failure does not necessarily decrease as sales increase. In fact, rapid growth often increases the demand for working capital, which can create cash flow pressure and leave otherwise successful businesses vulnerable if growth is not properly financed and managed, says Buntu Mjindi, Investment Manager at Business Partners Limited.
the demand for working capital, which can create cash flow pressure and leave otherwise successful businesses vulnerable if growth is not properly financed and managed, says Buntu Mjindi, Investment Manager at Business Partners Limited.
As sales grow, businesses often find their resources stretched to the limit. Overdraft facilities are fully utilised, savings are depleted and available funds are channelled into stock purchases or project expenses. In this environment, a single overdue payment from a major client or one slow trading month can severely affect cash flow and leave a business unable to meet its obligations, potentially causing long-term damage.
The good news is that most of these risks can be mitigated through sound financial management. Importantly, business owners do not need a finance degree or a chartered accountant qualification to implement effective financial controls, says Buntu.
He recommends following the seven financial hygiene practices below, which every business owner can adopt, regardless of their financial background:
- Manage cash flow diligently
Prepare cash flow forecasts, review them daily and update them regularly to maintain a clear understanding of when money will be entering and leaving the business. Too many business owners only create cash flow forecasts when they are experiencing financial difficulties or applying for finance. This is a reactive approach that can leave businesses vulnerable. Effective cash flow planning should form part of your daily business routine and decision-making process.
- Separate your personal and business finances
This is one of the simplest and most effective ways to gain control of your business finances. Avoid using business funds to cover personal expenses. Instead, open a dedicated business bank account and pay yourself a fixed salary. This creates greater financial clarity and helps instil financial discipline.
- Budget and plan for the future
Maintaining an up-to-date cash flow forecast is a significant step towards developing a forward-looking mindset rather than focusing solely on daily operations. Budgets can be derived from your cash flow forecasts and used to guide spending decisions, monitor performance, and set realistic sales targets.
- Build financial reserves
Once you adopt a proactive approach to cash flow management and budgeting, the importance of maintaining a financial buffer becomes clear. Building a cash reserve provides protection during unexpected challenges and periods of reduced income. Cash flow forecasting and budgeting also make it easier to set aside savings consistently. Many businesses aim to build a reserve equivalent to at least three months’ worth of operating expenses.
- Monitor financial performance consistently
If you are already using updated cash flow forecasts and budgets, the next step is to conduct regular financial reviews. Monthly reviews help identify where actual income and expenditure differ from budgeted figures, enabling business owners to detect and address problems early. Regular analysis of financial statements transforms them from compliance documents into valuable decision-making tools. While concepts such as gross profit margin and debt-to-equity ratio may sound technical, they are straightforward to understand and can provide powerful insights into the financial health and performance of a business.
- Manage debt responsibly
When used wisely, debt can help a business grow and thrive. Borrowing is beneficial when it is used to improve productivity, increase profitability and when the business has the capacity to repay the debt comfortably.
- Expand carefully and strategically
Business expansion carries significant risks. A new machine may not deliver the expected productivity gains. New employees may take longer than anticipated to become fully productive. A new product or service may fail to generate sufficient demand, while a new project could consume so much time and energy that other critical areas of the business suffer as a result.
Of course, choosing not to expand also carries risks, including losing market share to competitors and missing out on emerging opportunities. However, expansion should never be driven by impulse, but should be approached with careful planning, thorough analysis, and clear strategic intent to maximise the chances of success.
About the Author: BPL Admin
