Growing your venture through cash flow management

2011-02-11
THE PUNCH Newspaper- Layi Adeloye

To most micro and small business operators, ‘money is money, as long as it is available for spending.’



Spending available money at the moment one needs it, in the opinion of this class of entrepreneurs, is the ‘main reason’ for establishing a business in the first place.



However, finance and organisational experts believe that this wrong idea about business formation has been a major factor responsible for the high mortality rate among micro and small businesses.



According to these experts, the identified problem here is a lack of good cash flow management. A good business set up should have its capital segmented into capital fund, inventory management fund and working capital. This simply means that, under a good business management scheme, the whole capital outlay available for business operations should not be tied down on equipment and infrastructure, while such a business suffers from a lack of working capital (money needed to buy raw materials, pay for exigencies or the money needed for other day-to-day expenses).



Importantly, for a business, there is the need for money to continue to flow in and out (invested in further production and marketing processes). This is called cash flow.



And as any business owner (especially small business owner) knows, maintaining a smooth cash flow requires juggling nearly every facet of a business; including staying on top of accounts receivables and extending lines of credit to inventory management. The essence of a successful cash flow management is to regulate the money flowing in and out of your business.



Experts believe that increasing a business’ cash flow means reducing the amount of fixed capital that the business needs to support its given level of operation. An increased, consistent cash flow can only mean creating a predictable business pattern, making it easier to plan and budget for future growth.



On the contrary, poor cash flow planning or a lack of it has, in most cases, accounted for the death of several Small and Medium Scale Enterprises.



Financial experts and business managers believe that some steps are imperative on the part of a small business owner to take in planning his business’ cash flow.



The Principal Manager, Bola Tunmbi & Co., a financial services firm in Lagos, Mr. Bola Ajetumobi, says several schemes can be put in place by small and micro businesses, which will help them make gains on the part of cash flow management.



According to him, one of such schemes is to stretch out all payments (payables).



His view is that a business owner can take the maximum amount of time allotted (say 30 or 60 days) to pay his suppliers. The idea is to see these terms as an interest-free line of credit from the suppliers. The benefit of this is that it gives such a businessman sufficient time to collect receivables without spending money on short-term credit lines.



The American Express Open Small Business Network, on its website, www.openforum.com, has a similar advice: take advantage of early payment incentives.



“If your suppliers offer you a discount for paying early (usually within two weeks of receiving the bill), take them up on it. Think of it this way: a two per cent on a 30-day invoice is equal to a 24 per cent annual return if the money was invested. If your suppliers don’t offer this kind of incentive, ask for it; they may be willing to offer the discount in return for speeding up their receivables,” it advises.



Another step suggested by the American small businesses body is for the business owner to have a focus on balancing his client base.



According to the body, many service and professional companies, like advertising or PR agencies, accountants, attorneys and real estate management firms, among others, work with certain clients on a project-by-project basis.



“Look for ways to convert some of these clients to a retainer relationship, where they pay you a set amount of money per month for a certain number of services. You might want to offer them some kind of incentives, in form of value-added services and discounts, to encourage them to shift to a retainer. This may reduce your profit margin, but it will help make your cash flow more predictable,” the body explains.



To Ajetumobi, perhaps the most effective scheme in cash flow management is for the business owner to constantly check his pricing mechanism and be sure that his price keeps pace with his rising costs.



He says, “Most small businesses are too often afraid to raise their prices. The starting point is to ask yourself, as a business owner: when last did I raise the price of my product or service? The reluctance to raise the price is, in most cases, as a result of fear of losing customers.”



However, he says customers actually expect their suppliers to institute small but regular price hikes. “So, the strategy is to be sure that you check out your competition on a consistent basis. If they are charging higher prices, you should do so too,” he advises.



The American Express Open Small Business Network also recommends leasing as an effective way of maintaining a good cash flow management.



It says, “Leasing generally costs more than buying, but these costs often can be justified by the cash flow benefits. By leasing computer equipment, cars or other tools you need to expand your business, you will avoid tying up cash or lines of credit that might better be used for running your business day-to-day.”



It adds, “Also, do not buy all you need in one place. You can also save money by splitting your business between suppliers. Closely examine where you need to pay for added service, and where you can save money by paying commodity prices.”

 

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