Do you manage the cashflow of your business?
We’re living in a strange world. During the previous production season, most grain farmers, especially in the summer rainfall area, experienced a drought with low production but high crop prices. This production season it is vice versa – record crops but low prices. However, for many farmers the result of these totally different circumstances is the same – a problem with cashflow.
Just a reminder – should you claim that your business is successful, your business must be successful in three areas. The financial position must be positive, indicating that you have at least twice as much assets than liabilities. Secondly, you must make a profit – income must be more than expenditures. Thirdly, your cashflow ratio must be at least 120%, indicating that you normally have cash available when needed. To be without cash can be very harmful to your business for many reasons. To manage a business, brings daily opportunities and challenges. One of the challenges you will experience, is the management of cash.
Management of cash
Let’s consider a few steps to do just that. Manage your debtors (people who have bought something from you, but must still pay you) with the first step being to reduce debtors as much as possible. Should they not pay when arranged, it will put you under severe pressure with regards to your cashflow. Follow up on them if they do not pay as arranged – call them, send a sms, email them. If possible, do not sell on credit.
Manage your creditors – the people you have bought something from and still owe them money. Pay them on the last day that you should as arranged to keep your cash in your pocket as long as possible. Normally you will have a 30-day limit, interest free. Make use of this period and if possible keep your cash in some account where you can earn some interest. However, be mindful to build a good credit record with your creditors, you may need it at some point in time.
Pay attention to stock levels – we are especially referring to the level of input stock you keep on the farm. Sometimes you may be tempted to purchase an input such as fertiliser at a ‘special’ price, but must then keep it in stock for 3 or 4 months before using it. Remember, that is cash tied up in stock.
Many farmers sell products for cash from the farm or at an informal market. Nothing wrong with doing this, but keep proper records of these sales and the cash involved. Do not let the cash in your pocket tempt you to buy something that you do not need. Rather deposit the cash in a savings account and earn interest on it.
When you have cash in your bank account ensure that you earn interest on it. Negotiate it with your bank. Remember financial institutions will never forget to charge you interest on money you earn them, but will never pay you interest voluntary if you do not negotiate it with them. It is your right to negotiate, do it – you can only score from it.
Lastly, the best way to manage your cash, is to manage it by ways of a monthly cashflow budget basis for a financial year. This budget will then project the way you should use your cash in a financial sound way.
This implies that you must discipline yourself to use your cash as planned. When something unforeseen happens adapt your plan accordingly, and then stick to your adapted plan. Be very careful of spontaneous buying or on the spur of the moment. Before you buy consider your plan! What will the affect be on your cashflow budget? That is financial management.
Many owners of small businesses think they do not have to keep good records and control the finances of his/her business simply because they are small. They think that all ‘bookkeeping’ stuff is for the bigger businesses and they think because my business is small I know exactly what's going on with the finances of my business.
It might be true for a while but one of the main reasons for the failure of small businesses is because they do not understand or manage their finances properly. The fact of the matter is, the smaller your business, the better your management – especially financial management – should be. Simply because the smaller your business, the less leeway you have for mismanagement.
Why is cashflow important? Any business has expenses which must be paid, for instance on a regular monthly basis such as salaries, electricity bills, telephone accounts, feed, etc. There may also be contractual payments on loans which must be paid on a quarterly, six-monthly or annual basis or at harvest time. These expenses must be paid when they are due and the payments cannot be postponed or changed at will. Remember cash is king, treat it with respect.
Article submitted by Marius Greyling, Pula Imvula contributor. For more information, send an email to email@example.com.
Publication: September 2017