The GroFin Guide for entrepreneurs: How to improve your cash flows

Have you ever faced a stretch because of inability to meet payments based on current cash flows? No wonder then, if you ask anyone who manages their own company, they would tell you without hesitation that cash is king. When it comes to your own business, sales are important, yes, but making sure that you get paid in time for what you’re selling is equally, if not more, important.

To highlight the importance of cash to a growing business, many entrepreneurs have told us that while their sales increased year-on-year, they still lacked funds to cover their overhead costs. Ultimately, inadequate credit and collections policy were found by our team to be the underlying cause.

With its thoughtfully designed and well-structured suite of business support services, GroFin helps its clients add value to their business in the critical area of cash management. Based on our wealth of experience in helping entrepreneurs manage their business without facing a cash crunch, we bring to you six ways in which you can improve your cash flows:

1. Speed up collections from clients:

Focus on getting money back into your business as quickly as possible. Ask customers to make deposits when orders are taken. Reward good customers with discounts. Keep an eye on new customers, and implement compulsory credit checks for noncash customers. Preferably, avoid giving credit as far as possible. Track accounts receivables proactively, and institute a cash on delivery mechanism as an alternative to refusing to do business with slow-paying customers. Finally, even if a customer goes “bad”, don’t stop collection efforts – negotiate a compromise or stretched pay-off plan, and turn the account over to a collection agency if all else fails.

2. Get favourable supplier credit terms:

If you reward good customers for paying early, why shouldn’t you expect the same from your suppliers? Negotiating small discounts with your suppliers can have a big impact on your cash flows. Pay your bills before time and request your supplier to extend discounts for early repayment. Also, plan your requirements in advance so you can buy in bulk and negotiate more favourable payment terms with your suppliers. However, at times, buying in bulk could itself be the reason for cash flow problems as you could find yourself sitting with the stock for extended periods and unable to convert it into much-needed cash. Bottom-line: Buying in bulk could be beneficial but it must be done by weighing its benefits in the form of discounts against potential losses that could arise from holding stock for extended periods.

3. Trim inventory levels:

Outdated inventory is like last year’s fashion – there is no sense keeping it in the closet and paying for its storage and upkeep if you can get rid of it, even at a discount. Strategies like stocking only fast-moving items and getting suppliers to ship custom-made items from their warehouses will ease the stress of having to stock and sell slow-moving inventory. Declare sales on slow-moving inventory before it gets obsolete, and make sure you consider stocking and maintenance costs as well as potential losses due to wear and tear of sluggish inventory before deciding discounts on items for sale. Dead or slow moving stock must be sold as quickly as possible even if it is below cost.

4. Lower your overheads:

While you are busy growing your business, overhead costs can pile up only too quickly, whether in operations, marketing, administration or human resource management. Focus on minimising rent and labour costs, which are typically two of the biggest expenses that growing businesses face. For instance, undertaking robust resource planning and forecasting human resource requirements accurately can accrue significant savings. Hiring part time employees for peak periods, and giving employees the flexibility to work from home would enable you to work from leaner premises with lesser staff, allowing you to save on both rent and labour expenses. Another tip to ensure your overheads can be safely met is to calculate your daily break-even sales, especially if you operate a retail outlet, and then track sales against that target.

5. Avail an accountant’s services:

Working with an accountant may mean added expenses in the short run, but the recurrent savings from applying their expert recommendations could more than outweigh the additional pay-out. An accountant would help you review cash-flow projections, prepare quarterly cash forecasts and identify periods of excess cash and cash shortages. During periods when the business is cash-rich, the excess cash can be reinvested into the business to stimulate further growth, or invested in fixed deposits and other savings instruments to earn interest for you; and you can prepare for anticipated cash shortages with the added interest income from cash rich periods, as well as boosted advertising efforts to win more business in slow periods.

6. Grow revenues at a higher rate:

After you have managed to plug gaps in your receivables and inventory on one hand, as well as negotiated favourable terms for your payables and reduced overheads on the other, if you are still facing a cash crunch, it may be time to re-look your core business strategy and grow your revenues at a higher rate. To achieve the required business boost, consider avenues to grow your revenues sustainably over the long term, such as channelling more cash flows into higher-margin products, selling existing products in more profitable markets or a combination of both.

Growing your revenue at a higher rate does not come without its inherent requirement for additional funds. Choose your finance partner with care, and make sure that you select a financier who aligns your repayments with your cash flows. Discuss your growth needs with your finance partner upfront and also candidly indicate the approximate timelines over which you expect to see the returns from your business expansion project.

Unlike traditional financiers, GroFin helps you to track your business’s progress with monthly account reviews that allow for course corrections in a timely manner, and help you grow more sustainably over the long term. Our investment managers come with many years of experience in helping small and growing businesses achieve their growth objectives, and add value to your business with their continuous support and expert guidance.

For instance, GroFin funded Highland School was facing cash flow issues till GroFin did an in-depth analysis of its business in the usual course of its client evaluation exercise and proposed a solution.

“Highland School did not have a proper accounting system. Our emphasis in the pre-business support stage has been to urge the client to have an accounting system that facilitates efficient financial management and reporting,” says Teddy Ndayambaje, Investment Manager, GroFin Rwanda.

Throughout our relationship with you, from the pre-finance stage to the post-finance stage, GroFin will provide your business with appropriate business support designed to meet its growth needs. To date, over 8,000 entrepreneurs have benefited from our business support expertise. You could be one of them! Apply today and get the GroFin advantage on your side.