We’ve all heard the phrase:
“Turnover is vanity, profit is sanity, cash is reality.”
You need cash to buy goods and services, to pay your suppliers as agreed, to pay salaries, wages and taxes and to service loans. You also need cash for growth and expansion. Cash is vital for the survival of any business. This even more so in dealing with the fallout of COVID-19.
There is nothing like drawing money out of your home loan for the wage bill to bring home the reality of cash management to the entrepreneur. When we were awarded our first major appointment with Eskom, we had to provide a substantial tender guarantee to prove that we could execute the works. This in itself was a challenge and certainly a financial burden. Then there was the retention of 10% on the full contract value, paid 12 months after completion of the contract. This necessitated further fancy footwork on our side, which would simply have been impossible without building trust and forging strong relationships before this.
Growth in the form of increased turnover will most probably lead to increased working capital. This you can control to some extent. For debtors, make sure you have clearly defined terms and conditions and credit policy in place. Your sales system should ensure that all goods and services delivered are invoiced. Invoices and debtors’ statements must reach the correct people timeously to reconcile and process payment so that you can get paid on time. Keep an eye on your stock levels. There is a fine balance between making the most of volume or special discounts, keeping the sales or production machines turning, and tying up cash by over-investing in stock. Negotiate reasonable payment terms with your suppliers and stick to those as far as possible. This is the first building block to good relationships with them.
Surprises, while part of the entrepreneur’s reality, are not at all welcome. The better you plan and prepare, the less the likelihood of surprises and the effect that they may have. Prepare a month-end cash forecast from week one, and update it weekly. This only needs to be high level, but accurate enough to help you identify any crises well in advance so that you can plan alternative solutions.
In the same vein, keep a three- or six-month rolling cash forecast at a high level handy to help identify possible problems. Provisional tax, a balloon payment on leases, capital expansion, and payment of bonuses come to mind. This will allow you time to prepare for and address the issue, especially if they involve finance from institutional sources that are notoriously slow in being released.
Cash is king. Treat it as such.
So say the bosses
“Never take your eyes off the cash flow because it’s the lifeblood of business.” – Richard Branson
“Too often we measure everything and understand nothing. The three most important things you need to measure in a business are customer satisfaction, employee satisfaction, and cash flow. If you’re growing customer satisfaction, your global market share is sure to grow, too. Employee satisfaction gets you productivity, quality, pride, and creativity. And cash flow is the pulse—the key vital sign of a company.” – Jack Welch
“Making more money will not solve your problems if cash flow management is your problem.” – Robert Kiyosaki
“Cash is king for all businesses. For entrepreneurial businesses cash is god.” – Marnus Broodryk
The Sologix solution
The GrowthWheel toolkit includes a focus area dedicated to the management of cash and another to the financing of the business. It covers topics from cash forecasts to financing options, an investment catalogue to risk analysis.
Traditionally, financial management is regarded as a supporting function, and cash management a subsection of this. As significant as it is, many business people give it scant consideration. We, on the other hand, believe that the management of cash is a key activity in any business. Regardless of your business type, without cash, you cannot survive. We cover this extensively in the Business 101, Understanding Finance and Crisis 101 online courses.
Engage with Sologix to help you on this path. Join an online course or contact us for personal business coaching by sending us an email here.
