Kobus Engelbrecht, spokesperson for the Sanlam/Business Partners Entrepreneur of the Year competition, says that although 'cash is king' is a well-known old phrase, it remains very true to this day. In a business, cash is a very important lifeline in any sector and determines the difference between its existence, expansion or failure.
He says that while regular forecasts are drawn up to ensure sufficient cash flow for a business in the future, these ultimately remain guesses. "Entrepreneurs can plan for the worst case scenario, but there is a possibility something can blindside the business out of the blue, such as a large client unexpectedly going insolvent or a major customer holding payment. It is for this reason that it's vital to have a contingency plan in place, whether it be in the form of a business' savings account or its ability to access additional credit at ease, such as having a bank arrangement in place."
Engelbrecht adds that these examples are worst case scenarios, however, smaller incidents have also caused the closure of businesses, such as too many sales orders, and too little cash to manage the orders. "How effectively an entrepreneur manages and analyses their business' cash flow can make or break a business. One of the biggest challenges entrepreneurs face is funding and cash flow, and mismanagement of these vital elements is responsible for causing a majority of businesses to fail within their first year."
Effective cash flow management allows a business to estimate the amount of cash readily available at any given time, projects trends in cash inflow and outflow, as well as evaluate if a surplus or shortfall in cash could potentially occur.
Entrepreneurs need to have an organised approach to cash flow management, says Engelbrecht. "They need to keep track of every incoming and outgoing payment. They also need to understand the difference between profit and cash flow, as although invoicing a client for a sale or service rendered creates revenue, only actual payment on that invoice creates cash."
"Also, not all cash coming in is profit as some expenses related to the provision of the product or service that may still need to be paid. If all clients paid for sales/services upon delivery, cash flow wouldn't be an issue. This, however, isn't the case and late payment can have huge knock-on effects in a business bearing in mind that from the profit figure, many other items feed off this, such as accounts receivable, inventory, accounts payable and capital expenditures," Engelbrecht says.
"Cash flow is the life blood of any business and effectively managing this aspect of the business will allow more flexibility when there is a need to address emerging dilemmas, such as late payment, or when critical decisions need to be made, such as having the capital available to purchase additional stock in order to satisfy client demand."
It is also crucial that entrepreneurs understand their business cycle and plan their cash flow accordingly in order to provide for lower sale figures, lower debtors payments, bonus payments, lower stock levels at suppliers and provisional tax payment obligations.
"Running a business is exciting and by taking a moment to implement structures to ensure steady cash flow, the business will be more likely to proposer and result in a flourishing business for years to come," concludes Engelbrecht.
