Many business owners start their own ventures in pursuit of freedom, the freedom to work for themselves, not having to answer to a boss, setting their own schedule and deciding when and how to grow.
In reality, however, it is easy to become trapped by your businesses. Weekends and evenings are often sacrificed and founders find themselves dancing to the tune of demanding clients in a fiercely competitive market. Rather than enjoying the freedom to find your own path, you can easily find yourself trapped on a hamster wheel of trying to keep your business afloat, says Xander Ngoyi, area manager at Business Partners Limited.
The key to maintaining your freedom in business, Xander says, is good cashflow management. A business with healthy cashflow gives its owners the freedom and flexibility to pursue their goals. When cash flow is patchy, however, business owners can quickly become trapped by the businesses they built to set themselves free.
Xander believes that Freedom Day celebrated on 27 April is a good opportunity for business owners to reflect on how free they really are within their businesses. He shares the following cashflow tips to help business owners manage their way towards financial freedom:
- Know the early warning signs of a looming cashflow crisis
According to Xander there are several signs business owners should watch closely. He recommends conducting a weekly review to identify and address issues before they escalate. Keep a close eye on how long debtors take to settle their accounts, whether you are having to use borrowed money, including your overdraft, for everyday business expenses, whether you are falling behind in paying your bills, and whether your bank balance remains stagnant even as your sales grow.
- Strengthen your debtor management
Invoicing promptly and following up on overdue invoices are the basis of good debtor management. Cashflow can be improved further by negotiating and incentivising early payment, for example by offering small discounts for settling invoices ahead of schedule.
- Keep your overheads steady
Overheads have an uncanny way of creeping up as soon as the business owner stops actively monitoring them. Small, seemingly insignificant expenses, such as monthly subscriptions to software packages used occasionally, can add up into substantial cost over time. Consider outsourcing certain functions rather than absorbing them as permanent overheads, for example hiring an external cleaning service rather than employing a full-time cleaning team. Review your overheads regularly to find ways to reduce and contain cost.
- Build a cash runway
A robust business should have three to six months of cash available as a buffer in case of a market calamity, think Covid-19 or a sudden emergency inside your business. You often have to use your surplus cash for growing your business, but don’t simply neglect building a buffer. Devise a plan to save towards a cash cushion incrementally.
- Track your gross profit
An important tool to guard your financial freedom is to maintain a gross profit (GP) margin target in order to keep your operational expenses low. GP ratios differ widely across industries, but with a bit of research you will be able to find the standard for your industry to measure your operational efficiency against. Read industry resources or consult an industry expert or accountant to establish an appropriate benchmark.
- Manage your inventory
Your stock can absorb a huge amount of cash, which can easily lead to a cashflow crisis. Work on finding your optimum stock levels and make it a habit to clear out slow moving or old stock regularly before it becomes obsolete.
- Diversify your income streams and suppliers
Relying on just one product, service, target market or supplier makes your business very vulnerable to changes. Even if your business is thriving, cultivate diversity to shield your cashflow from sudden disruptions in any one area, product or service.
- Separate personal and business finances
Mixing personal and business expenses makes it difficult to gain a clear understanding of your company’s financial health. Keep a separate business account and set of books for your business to ensure greater transparency and control.
- Stay aware of external developments
Business owners engrossed in the day-to-day operations of their organisations can easily lose sight of wider and geopolitical trends. For example, many business should currently be preparing for inevitable fuel-price increases because of the US and Iran conflict. While such events may be beyond your control, anticipating their impact allows you to safeguard your financial freedom in advance.
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