This is according to Lionel Billings, head of National Consulting Services at Business Partners, who says that in light of National Savings Month, and given the challenging economic environment that SMEs currently operate in, it is crucial that business owners know how to manage their cash flow effectively, now more than ever.
Billings says that businesses need to differentiate between profit and cash flow: "Many businesses are profitable, yet run out of money due to ineffective cash flow management. Many businesses generate substantial profit during a month as a result of orders or sales, but as payment often isn't due for another 30 or 60 days, business owners sometimes find themselves in a situation where they do not have sufficient cash flow to continue operating, as they are unable to produce products or pay staff salaries."
Billings explains that for businesses to avoid finding themselves in this situation, owners need to be aware of a few key areas that could result in cash flow problems: "One area is credit control. It is crucial to have strict credit policies in place, as poor credit control can result in a business not receiving payment on time and in turn, could lead to the business defaulting on its obligations. It is also important to remember that larger enterprises often take longer to process invoices, which sometimes needs to be taken into account as late payment can have a drastic effect on SMEs."
Billings says that order fulfilment is another area that business owners need to be aware of: "If a business doesn't deliver its products or services on time, the invoice will not be paid. To avoid over-promising to clients, a business' workload needs to be planned properly."
He says that other factors that could lead to cash flow problems include inefficient ordering systems, poor management accounting, inadequate supplier management and lack of control over gross profits or overheads.
Billings says that the essence of successful cash flow management is the regulation of all money flowing in and out of a business: "An increased, consistent cash flow will create a predictable business pattern, making it easier for a business to plan and budget for future growth."
Billings offers the following tips to business owners on how to increase their cash flow:
For more information, go to www.businesspartners.co.za.