By: René Botha
For South African business owners, particularly those in sectors hard hit by fluctuating demand, maintaining a healthy cash flow can be difficult. Yet with rising operating costs and tighter access to credit, effectively tracking cash flow has become key to keeping a business afloat.
Cash flow is the lifeblood of any business. While profits are important, unlike cash flow, they don’t always reflect your business’s immediate financial health. By focusing on cash flow, business owners can ensure they have the liquidity to meet their obligations, even in tough times.
Five key strategies for tracking cashflow effectively:
1. Conduct regular forecasts
One of the most effective tools in managing cash flow is the ability to predict it. Businesses should conduct regular forecasts to anticipate potential shortfalls and identify periods when cash might be tight. A detailed cash flow forecast gives business owners a glimpse into the future, allowing them to proactively plan for upcoming expenses and make the necessary adjustments in order to mitigate any financial constraints.
A cash flow forecast should ideally cover at least three to six months ahead, depending on the business’s operating cycle. It should include all expected income, such as sales and other revenue streams, and all outgoing expenditures, including rent, salaries, supplier payments, and loan repayments.
2. Monitor payment terms and collection cycles
Timely payments from clients and customers are vital to maintaining a healthy cash flow. Delays in receiving payments are one of the most common causes of cash flow problems. It’s therefore crucial for businesses to establish and enforce clear payment terms and actively manage their collection cycles.
This can be done by implementing strict invoicing procedures and encouraging early payments. Automating invoicing systems and sending reminders can greatly reduce the time spent on collections. Also, consider offering discounts for early payments or charging penalties for late payments to encourage prompt settlements.
3. Reduce unnecessary expenses
In challenging times, every rand counts. It is important to trim the financial fat without compromising the quality of goods or services. Cutting back on non-essential costs can free up cash that can be redirected to more pressing business needs.
This may involve negotiating better terms with suppliers, seeking alternative vendors, or finding ways to operate more efficiently. Conduct a detailed review of all business expenses to determine which ones are essential and which can be reduced or eliminated.
4. Maintain a cash buffer
As unexpected costs can arise at any time, a cash buffer is essential for weathering the storm. Businesses must aim to maintain at least three to six months’ worth of operating expenses in cash reserves. This cushion can provide much-needed breathing room if revenue slows or if unexpected expenses crop up, such as equipment repairs or urgent stock purchases.
Building a cash buffer during tough economic times can be challenging, so businesses may need to do this incrementally. Set aside a small portion of profits each month into a reserve account, which can gradually build up over time.
5. Utilise the latest technology
In today’s digital age, business owners have access to a range of tools that can simplify cash flow management. Entrepreneurs should make use of cloud-based accounting software and apps designed to track income and expenses in real-time. The right tools can help you stay on top of your financial situation without the need for complex spreadsheets. Many platforms offer features like automated invoicing, expense tracking, and cash flow projections, making it easier to manage your finances.
Cash flow management should always be a priority, not just during crises. Businesses that actively manage their cash flow are in a better position to ensure long-term sustainability. It enables them to adapt quickly, seize new opportunities, and respond to any challenges that may arise.
* Botha is the regional investment manager at Business Partners Limited.
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