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Access to financing and maintaining healthy cash flow – central to long-term survival for start-ups

Part two of this series spoke to the importance of establishing and implementing a business model that is both functional and adaptable to socio-economic change. It also covered the centrality of business development and asking, “what’s next?”

Part three references findings from the Business Partners Limited Q2 2021 SME Index – a survey measuring the attitudes and confidence levels of South African small and medium enterprise (SME) owners – which pointed to insufficient cash flow and lack of funding as major challenges for South African SMEs and often results in the failure of a venture.

The issue of finance is more convoluted than many entrepreneurs realise. While there are very few SMEs that can get off the ground without at least a small capital investment, starting a business from the ground up with a ‘R0.00’ investment balance in terms of cash, still requires a significant investment of time, and time is money – quite literally.

Let’s explore this issue in more detail:

  • The inability to maintain and sustain a healthy cash flow

The term, “cash flow” refers to the cycle that money undergoes on its way in and out of a business. For SMEs, it’s often a make-or-break factor. Maintaining a healthy cash flow allows a business to respond quickly when meeting unexpected challenges. As an example, consider the impact that the recent spate of riots had on the cash flow of SMEs across the country as some were robbed of their stock and were unable to trade. Arguably, strong cash flow is also crucial for sustained growth as it enables greater flexibility. However, there are a few common mistakes that SME owners make with regards to cash flow, outlined below:

  • Overestimating future sales

There is an adage in the investment community that rings true for SMEs: “Past performance is no guarantee of future performance.” A sudden upsurge in sales volumes can lead to business owners becoming overly optimistic and spending too much of their available cash on buying more stock, marketing or paying suppliers. This is where realistic forecasting becomes indispensable.

When forecasting future sales, it’s imperative that business owners consider all contributing factors and don’t base potential earnings solely on past performance as this could land them in trouble. There are a wide range of factors to consider including market activity, competitor performance and rate of innovation, the country’s economic climate and changes in client demand. Inaccurate projections followed by impulsive and undiscerning action, can bring a small business to a standstill.

  • Slow-paying customers

One of the most common factors that stands in the way of optimal cash flow, is slow-paying clients. According to the Business Partners Limited Q2 2021 SME Index, only 15.9 percent of SME owners expressed extreme confidence that their clients will pay within the stipulated time. Many based these predictions on past experience – clients ignoring payment deadlines is certainly not a new phenomenon and was a challenge well before the pandemic. In fact, the same survey identified cash flow as the main challenge anticipated by South African SMEs in the next six months.

The importance of having an efficient debtors’ control system and policy in place cannot be overestimated. Start-up founders often find themselves “playing accountant” in their formative years, expending a considerable amount of time following up on late payments. Assertiveness in this case is an invaluable quality. The process can become complicated when a penalty system for late payment has not been communicated upfront. These systems should also be governed by an internal process that indicates when payment reminders are sent, when follow-ups are done, and whether incentives for early payments are a viable solution.

  • Lack of financing

As the SME Index reveals, 50 percent of SME owners deem access to finance for the growth and sustainability of their business as vitally important.

In previous columns we’ve mentioned how important it is for the public and private sector to work together to build a socio-economic environment that is conducive to entrepreneurship, particularly since small businesses are key contributors to the country’s GDP. It’s important for aspiring entrepreneurs and start-up owners in their first few years of business, to remember that business finance can come from a range of sources, many of which are sometimes overlooked due to lack of research.

Below is a list of some of the forms of financing currently available to South African business owners:

  • Business loans from banks and financial institutions
  • Business loans from independent firms like Business Partners Limited
  • Venture capital investment and angel investors
  • Government grants
  • Crowdfunding
  • Business credit cards
  • Bootstrapping (or self-funding)

The most important first step for any business when considering funding, is to construct a comprehensive business plan. These plans should include a company’s mission statement, a description of their value proposition or unique selling point, and an outline of their product or service.

More pertinently, a business plan needs to include high-level growth plans detailing the ultimate vision for the business and how this will be made possible through capital investments, resources, time and energy. The more comprehensive a business plan is, the easier it is to identify a financier best suited for your business and the more accurately projections can be made around what is needed for the company to flourish in its crucial first years.

This article is the last in a series of three articles that unpack why SMEs fail and how to circumvent some of the most common issues.


About the Author: Ben Bierman

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Ben Bierman has been our Managing Director since 2015. He joined our company in 1990 and has risen through the ranks occupying various positions ranging from being a management accountant, Head of Information Technology and Chief Financial Officer. Ben is an avid reader, enjoys classical music and being in the outdoors including for hunting trips. He is our go-to-spokesperson for our SME Confidence Index, SME sector policy and trend matters, and business leadership articles.