By Vaughan David, CEO of Business Cash Investments at FNB
Failure to optimise cash flow is one of the key reasons that could lead start-ups to shut their doors within their first two years of operation.
In order to increase your chances of sustainability, you need to focus not just on how much money you make as revenue, but also on how you are managing the inflows and outflows of that money.
One of the most cited causes of cash flow problems is the time it can take for customers to pay their bills, and one of the simplest but often overlooked precautions is to review your business’s payment terms.
Issuing an invoice that reflects valid payment terms and conditions is not a legal or SARS requirement, but it is good practice and can go a long way towards helping you manage your cash flow. It’s as simple as including a section labelled “Payment and Cancellation Terms” on every invoice, where you can capture agreed terms and conditions, or, if you have not discussed terms, it affords you an opportunity to propose terms that you know suit your cash flow demands.
Matching time frames
In principle, the aim should be to match the time frames between when your business gets money in, and when it pays money out for overheads, expenses and supplier costs.
If, for example, you pay weekly wages, you ideally need to have shorter payment terms in place with your customers. If you pay monthly salaries or have monthly stock and debt payments to honour, offering payment terms longer than 30 days can result in a gap between the time at which money is coming in, and the time at which your business is obliged to make payments out.
It’s good business practice to match these payment terms, or, even better, to ensure that client payment dates fall before cash outflow payment dates that apply to your vendors. You may want to consider negotiating a 45 to 60-day grace period with your vendors and suppliers.
By collecting money before you’re due to pay out money, you have a better chance of achieving what is called a positive “net cash flow” ‒ the difference between the cash inflows and cash outflows during a specific period. It optimises how you’re managing turnover and gives your business a better chance of surviving tough times, and can also leave you with reserves that you can invest.
When you are in a positive net cash flow position, consider opening a separate savings account where you can transfer any extra cash, and earn interest on that cash. This cash reserve can then start to serve as a savings buffer for any future unforeseen expenses, or to keep money aside for planned expenses like provisional tax. Remember to check which fees are charged (if any) and the type of access you will have to those funds.
This article first appeared in City Press.