Small Businesses Need for Cashflow Management

A recent survey conducted by Finscope on the composition of small businesses in South Africa, states that there are 5.6 Million small businesses and of those, 39% find finance as one of the major obstacles in business, particular emphasis on cashflow and  record keeping. These aspects of finance are most prevalent in start-ups and businesses under 2 years, as these are most susceptible to changes in cashflow and lack of record keeping

Small businesses aversion to the significance of Cashflow is based, to a large degree on awareness, by the business owners, of the need to manage cashflow from the onset. So long as more money seems to be coming into the business than going out, many owners do not give cash management as second thought.

 Many small business owners rely, to a large extent on their bank statement, in terms of evaluating their cash flow status at any one time. Cash in the business is not the balance on the bank statement, as in more cases than not, expenses and income paid or receipted may not reflect on the bank statement due to timing.

Cashflow can be very difficult to predict, in comparison to profit and loss, particularly for small businesses that are dependent on a few large customers. It can be further complicated by seasonal fluctuation depending on the type of business environment operated in. It is therefore of great importance that tools be used to keep a precise status on the cashflow at any one time. Managing cashflow is really nothing more than managing information.

For small businesses, to begin with, establish a cash cycle for your business. This draws out how cash moves from cash outflow (purchase, expenses, wages etc) to cash inflows (Sales, investments etc) and what occurs to the cash availability between these two activities. This in most relevant in business that have a high usage of cash in terms of generating their revenue.

Secondly build and establish your cash gap. By establishing your cash gap, your business will be able to identify where the cash is most utilised in your cash cycle and how long it takes for your cash to move through your business and generate income.  The cash gap analysis is composed of the 3 major element of your working capital, a)Accounts Receivable, b)Accounts Payable and c)Inventory and in each, you establish how long it takes to a) get paid, b) pay c) get(manufacture) and sell you product, and the measurement of this cycle within the cash gap is the conversion period. The conversion period measures the amount of time it takes to convert your product/service into your cashflow.

Once the cash gap has been established and the conversion period known, a cash projection should be drawn for your business. A cash projection spreadsheet is built to provide a picture of your cash needs for the business over a period of time, say 6 months or more. It helps the business owner see potential cash gaps, periods of cash outflows exceeding cash inflows and therefore allow the business owner to take steps to avoid expensive, uncontrolled overdrafts or failure to meet important expenses.

Sound cash management will give your business added advantage, as say, cost reduction in your manufacturing process, if managed efficiently. Small business must,  be vigilant in their analysis of their cycle to ensure they do not become insolvent whilst trading, through mismanagement of their cash.