Proper cash flow management

A vital life saver to SMEs this time of year

Entrepreneurial airline, Velvet Sky’s recent cash flow issues, resulting in supplier BP calling for the company to be liquidated, are a stark reminder for South African entrepreneurs of the potential damage that an ineffective cash flow system can cause to their businesses.

The airline, which has operated for almost a year, recently suspended its operations indefinitely after several of its flights were cancelled when it failed to pay its service providers, including BP and SAA Technical.

According to Nimo Naidoo, project manager of the Sanlam / Business Partners Entrepreneur of the Year® competition, one of the biggest challenges entrepreneurs face is funding and cash flow, and the mismanagement of these vital elements is responsible for causing over 70% of businesses to failing within their first year.

Naidoo says this time of year is especially sensitive for many businesses. “As many South African businesses had to pay provisional tax by the end of February, it is very likely that entrepreneurs are currently experiencing financial difficulty. Many business owners are not aware of the tax contributions they need to make at the end of the financial year and thus do not budget for this expense. This unfortunately often leads to liquidation and businesses sinking.”

She further stresses the importance of cash flow and describes it as the financial essence of any business. “If a company’s cash flow is insufficient, the company will be unable to meet its future financial obligations and may be forced to close down. Most respected analysts regard cash flow as one of the best indicators of financial stability, while researchers have consistently found the cash flow to total debt ratio to be the most reliable indicator of financial distress.”

Naidoo explains that correctly controlling your cash flow requires basic planning and management. “Begin, by creating a cash flow plan that outlines all your cash flow expectations. Next, simply analyse and review your expenditure habits. Once this is complete, set flexible cash flow targets for your business that meet the needs of your own business and strive to achieve these goals month to month.

“In the current turbulent and uncertain global market, it is imperative that businesses make financial stability their number one priority and safeguard their future by ensuring that their cash flow needs are adequately met,” says Naidoo.