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Julius Alagbe     |

If you want your business, irrespective of size or growth rate to stay cash positive, you have to understand the rule of the game. Significant numbers of small and medium scale businesses don’t have problem with their operations, but managing their finances is a serious hurdle to cross.

That doesn’t mean that other issues are not there to contend with, but experience has shown that sound financial management is at the centre of corporate survival strategies. Cash is not only the king in business; it gives artificial life to business irrespective of size.

If customers own cash, then they are the kings of wallets.  Cash comes when transaction cycle complete. Not so fast though if your business has to make credit transactions.  A company that has cash and not making much of revenue could outlive a company that is making revenue but are constantly cash trapped.

Let me re-phrase this, if your business is growing faster than your Cash flow, you are multiple times likely to go down; than if your company has some cash to throw around.  Not making enough sales is a problem no company is willing to experience –not even organisation set up for charity. That explains why entrepreneurs without background in finance, should be very careful how they operate.

For every endeavour, there are rules of engagement. You don’t just dabble into things without knowing why. A little knowledge about finance helps business managers in their day-to-day activities. Always assess your business position with the following in mind.

Keep your accounting book tight

Before you can even think about assessing your cash flows, you must have been a type that keep accounting records. It is funny but true, some businesses that generates tons of million don’t have proper accounting records. When they do, it is shabby. I have seen businesses that are generating up to N40 million revenue annually using logbooks as accounting records. Their eyes often clear-up when the tax authorities knock on their doors. When Tax people ask them, “Where is your VAT return”? Their response is often; “Ask Julius, he is our consultant”.

To such people, having proper accounting record is irrelevant but I tell you, there will be a time when you will need external cash injection, surely you won’t find anyone willing to bet on your business without track record.

Separate relationship

Many business owners still don’t believe that their businesses are different from them. Anytime they need cash, they would just write themselves cheque. For what purpose, one may ask. Usual answer is for domestic related needs. That’s sad. You don’t do that. This is common case among retail end businesses even with sizable annual revenues. Some of these businesses are pulling significant contracts, though poor credit policy. Is it really poor? Let me say they have weak negotiation power because their customers are bellwethers.

 

Your credit policy matters

There is no answer unless you understand the industry model. To a greater extent, competition shape how you respond to credit demands. In as much as this is the case, you have to know that you are working towards improving bottom line. Do you have same advantage to buy on credits from your supply? Do the math.

Wrong credit policy could kill your company faster than lack of sales. Sometimes, some businesses don’t understand there are costs attached to selling on credit. They look at the margin on sales but forget that cost of following up plus opportunity cost lost in the transaction could be heavy.

This is the major reason why many businesses become cash trap. You have to weigh the cost and benefits of selling on credit. And of course, credibility or track record of those buying on credits is as important.

Manage Cash burn rate

This simply means the rate at which your business is gulping cash. How much cash does your business use per period and how much is it generating at the same level of activity?  You have to look at the pattern of the business receivables and payables. If your receivables are high and payable low, you are mostly like to run into wall. It means your cash are outside but you don’t have same advantage to owe suppliers as backup.

Apparently, you need more cash to operate. If you have access to short-term credits, bravo, but this is often unlikely for growing companies. Established businesses could have muscles for such but not definitely start-ups.

The rate at which your business gulps cash must be at the same level as the rate it generates cash to be on safer side. At that point, you merely break even. Note: not all break-even points are good for business. Think about opportunity cost of each decision.

Keep your overdraft low if you have to use one.

Overdrafts come at a steeper cost, not good for a business that’s dangling and struggling to hacking growth.  Simply put, don’t do overdraft if you are not reaping abnormal profit from the business. It could wipe off your entire profit while you think you are in business.

How do you balance up? Often times, instead of pilling up receivables that may eventually burst, offer some discount for quick payment. Looking at ecosystem, my observation is that; this is more of a theory than practical. Some business operations function within available credit lines, they just have to owe you. That is how the game goes. Your survival as a business is secondary to many businesses. And, your competitors are musing over your fear.

SMEs owners should

Replicate the attitude! Playing the nice guy game doesn’t help business. You have to learn to play by the rule. I am not saying you should owe your suppliers to death, but your business could also leverage on credit purchase for its input side. Suppliers will black list your business if it turns out that doing business with you is injurious to their survival and growth plan. That’s reputation risk, very expensive to repair.

When you are selling on credit, be mindful and careful. It is murky zone for start-ups but medium size businesses can do it. Credits, sometimes, govern basis for transactions. The clog in the wheel is attitude to payment. Thus, make sure that..

Your eyes are on the revenue model

You must understand how, when and where your company is making money from. That is not enough too. You must constantly look at possible or missing link that might have crept in. Getting it right first time is a sweet melody, but hardly do people get things right first. That is not the end; you can still get it right before it gets you wrong. It is about sales here, so check up the chain.

Seek advice

You must be ready to engage with advisory service and consulting firms. This is as a matter of necessity. Listening to constructive opinions and third part views help businesses to staying afloat. You will tend to gather better business intelligence when you ask for your consultant views or opinion about financial position of your business and how it can get better.

Even when your business is large enough, employees’ oversight or familiarization with the system or structure is a risk. Don’t expect independent opinion to come from within. Survival first, and that’s where consulting practices come to play. If your business survives competition, it can make profit.

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