The Importance of Prudent Cash Flow Management

Namibia’s economy is showing signs of recovery, but the country’s small owner-managed businesses still have unique challenges, hindering their ability to grow and create wealth and jobs.

Some of the challenges entrepreneurs cannot overcome, and are best left to the government to resolve with a renewed commitment.

However, there is a significant one that they can and must tackle – or run the risk of business failure.

The challenges best left to the government to solve include obstructive and unfriendly officials, bureaucracy, the business climate, statutory compliance requirements and related levies and costs, and access to funding and capital markets.

A significant one that is within the control of entrepreneurs is cash flow management.

Cash flow is the payment made into or out of a business – the total amount of cash and cash equivalents that flow in and out of a company daily.

Specifically, the movement of virtual or real money at a business, regardless of size or sector, holds significant importance for that business.

Many businesses still measure performance by sales and continue selling on credit without taking cognisance of associated risks, overlooking the fact that an order is not a sale until the funds are in the company’s bank account.

At recent mentorship sessions with four entrepreneurs, they all expressed their dissatisfaction when seeking payment for goods supplied or services rendered to public sector entities.

I shared a difficult decision made decades ago when my company encountered a similar issue – payment delays by public sector customers.

In the short term, refusing orders from public sector institutions was detrimental to my business, but in the long term it resulted in business sustainability.

A business must be profitable to be viable and the need for effective cash flow control cannot be overlooked.

When applying for funding, any bank will examine the ability of an enterprise to generate cash that is necessary to repay a loan, on time every time.

That is how bankers measure business viability and sustainability, and smart entrepreneurs should use a similar approach.

Obtaining an order, regardless of its size in monetary terms, means nothing until the customer pays and the money is in your firm’s bank account.

It is essential that expenses must be incurred based on a firm’s need and not the owner’s desire.

That is an appropriate approach to cash flow management.

What is the purpose of doing business with a public sector entity, or for that matter with any customer, knowing that getting paid will be a challenge?

Smart entrepreneurs are aware of the importance of prudently managing cash flow and that it is not just a tedious task.

They realise that the amount of money coming in and flowing out of any business keeps the operation of a business functioning.

Managing cash flow effectively helps an entrepreneur make better and more informed decisions, cover obligations, pay operating expenses, replenish stock, fund growth and provide a buffer when confronting financial challenges.

According to statistics, the majority of enterprises fail due to cash flow issues and entrepreneurs must avoid their businesses becoming part of that statistic.

• – Danny Meyer is reachable at danny@smecompete.com