Some of these SMEs have found themselves cash trapped and unable to deliver on their client orders. Failure to deliver on client orders have led to lost goodwill and customers shifting to competitors; and the ultimate staggering of the business as it heads to its downfall.
Other SMEs have found themselves loaded with huge amounts of loans that they are not able to settle based on the cash inflows from their current level of operations. This leads the founders to look for additional debt to refinance the first debt; hence keeping the business under the constant pressure of overwhelming debt.
Debt by itself is not a bad a thing for a business. But when not well managed it can be catastrophic!
To avoid falling into cash traps that you could have avoided, you need to consciously start managing your business cash flows as the founder. This means you will need to make changes in how and when you order for business inputs, how and when you pay for your supplies, how when you deliver goods or services to your customers; as well as how and when you receive payment from your customers.
The goal of effective working capital management is to ensure that your business is always liquid. By liquidity, we mean that your business should always have enough cash to meet your short term financial obligations. These include paying your staff wages and salaries, rent, office utilities, purchase of raw materials and other day to day costs incurred in running your business.
On the other hand, you want to avoid a situation whereby you have too much cash sitting idle in your current bank account. This is due to the opportunity cost you incur for not investing the cash in the best alternative available in the market to preserve the value of your money and to keep growing your wealth.
Managing cash surplus therefore forms an integral part of the effective working capital management too; besides dealing with cash shortages.
The main focus for you as a founder when starting to plan your cash flow management processes should include how to manage your debtors, creditors, your cash and your inventory. In the second part of this series on effective working capital management we focus on these 4 elements of your business; and how to stay ahead of the game by ensuring that they are all well streamlined.
Author: Jeremy Riro – Managing Partner at Fie-Consult