When there’s no cash, there will be no business. Without cash, business owners cannot pay their bills, staff, themselves, or invest in future growth. Alan Miltz, co-founder of Cash Flow Story, perfectly sums it up with his mantra “Revenue is vanity. Profit is sanity. Cash is king”. 70% of businesses that fail are profitable when they close their doors.
There’s a big difference between cash flow and profit.
Most small business owners understand profit, yet few can describe their company’s cash flow. In the wake of Covid-19, many SMEs are going to be scrambling for loans to stay afloat. What is one of the primary indicators lenders look for to secure loans? It isn’t profitability. It isn’t sales. Its cash flow!
What is cash flow?
There are two cash flows in business—cash coming in and cash going out. Achieving good cash flow is simply collecting money faster than spending it. Easy enough, right? Maybe not. Cash flow rises and falls with revenue growth and the strength of management. Revenue growth alone doesn’t necessarily boost cash flow- if overhead goes up faster, cash flow suffers. There are four main factors that negatively affect a business´ cash flow: slow collections, falling margins, increases in inventory and paying suppliers too quickly.
There is a growing culture of paying SMEs late.
According to Fundbox, 64% of small business owners face late payment problems. The situation in South Africa is far more prominent, with 91% of SMEs impacted by late invoice payment. A survey of more than 500 South African SMEs showed that the average overdue invoice is paid about 18 days late. More than a fifth of respondents that had invoices paid late said they struggled to pay their own suppliers on time because of it, and 20% said they struggled to pay their staff because of late payments of their invoices. Half of these small businesses said that cash flow and late payments were a direct threat to their business, as well as their long-term business aspirations.
Long payment terms dominate.
Couple a growing culture of late invoice payment with long supplier payment terms, and we have a recipe for SME disaster. In today’s global goods age, long payment terms dominate. Worldwide, the average time it takes for a company to pay its suppliers is 68 days. It is easy to understand why SMEs are struggling to achieve good cash flow.
The role of working capital.
What is working capital? Working capital is not cash flow, even though the two terms are often used interchangeably. Working capital is the money used to cover all of a company’s short-term expenses, which are due within a year. It is defined as a company’s current assets minus current liabilities. Working capital is critical since it is used to keep a business operating smoothly and meet all its financial obligations within the coming year. Monitoring and analyzing working capital helps companies manage their cash flow needs so that they can meet their operating expenses in the coming months.
Cash flow is the lifeblood of any small business.
It keeps SMEs afloat. It helps them grow. Unfortunately, many small businesses don’t fully understand this until it’s too late. If we are going to see SMEs addressing the challenges of job creation, sustainable economic growth and alleviation of poverty, we must solve their cash flow and working capital needs. We could start by ensuring that SMEs´ invoices get paid on time, or even better, immediately.
With Finvex.tech as a partner, we can do just that and help prevent a large proportion of business failures!