AMANDA VISSER: The South African economy has been battered by the Covid-19 pandemic, and more recently political unrest in two of the country’s major provinces compounded our problems. Small businesses have been severely affected during this turbulent time, and the old saying that ‘cash is king’ is now more true than ever before. I am Amanda Visser and with me is Tom Stuart, chief marketing officer of fintech lender Lulalend. Tom, perhaps we can start off by explaining why cash flow management is so important.
TOM STUART: Thanks, Amanda. If we broadly define cash flow management as ensuring there’s more cash coming into a business than going out of it, or at least as ensuring that there’s sufficient cash on hand to fund the essential operating expenses, you can start to see why that would be so critical for small businesses who typically have very little in the way of cash reserves built up – especially during times of volatility like we’re going through now, where turnover can be seriously impacted.
To give you an example of how little cash reserves SMEs [small and medium-sized enterprises] may have in the hospitality sector in South Africa, the average cash runway – or the cash that the business has available to survive on – is only 30 days, so managing that cash flow and those cash reserves is so critical.
A recent global survey by US financial services group Intuit [Group] indicated that 60% of SMEs have cash flow deficits. The impact of this on these businesses is that they are unable to pay their suppliers, unable to service any existing debt they have, and even unable to pay workers or themselves in the case of owner-managed businesses.
So, at this most simple level, effectively managing cash flow is important because it can help avoid those cash shortages that can potentially prevent the SME from actually trading and continuing to operate.
Managing cash flow effectively and actually going through that process of doing so also has a number of other benefits.
It forces the business to understand its cash requirements – understanding what cash is needed for which expenses and when – and that in turn gives the business more visibility on where it’s spending money, helps it set realistic sales targets, helps it negotiate and define the right terms with its customers and suppliers, and even helps it understand the profitability of its products.
So there are a number of other benefits to effectively managing cash flow. Ultimately, if you’re a business with shareholders and investors, being able to show good cash flow management and projections based on that will build trust and help you get additional investment more easily as well.
AMANDA VISSER: So how does a company go about effectively managing its cash flow?
TOM STUART: The first thing any business needs to do is actually produce what’s known as a cash flow forecast. What that does is it allows you to understand what your monthly cash requirements are. To do that you need to do a detailed analysis into the trends and projections with regard to your incoming and outgoings of cash, so you need to be maintaining and reviewing sales and expense registers, debtors and credit registers, and continually have a clear view of the amount of cash on hand that’s available.
So, it’s really important to work with your accountant on this, to become great friends with your accountant and meet at least monthly to go through these documents and review them.
Once you’ve got that understanding of your cash requirement, or your cash flow forecast, some really important practical ways to improve your cash flow and build the cash your business has available – first of all: grow sales.
Many people focus on cutting expenses first. That’s important, but there’s no better sustainable way to improve your cash flow than growing sales.
So look at additional marketing, turning on new channels such as online e-commerce – if that’s relevant to your business. Don’t forget your existing customers; they’re often the easiest way to increase sales more cheaply and more profitably than new customers, so really focus on what extra value you can get from your existing customers. It’s only worthwhile growing sales if they’re profitable. So review your pricing and ensure that you’ve got the right margin so that any new sales are profitable.
As I touched on, it is important to review and reduce your expenses. So do go through and keep a close eye on where you’re spending money. Is it absolutely necessary, and how can it be done more effectively?
If you’re a business that operates particularly [by] selling to other businesses and you need to offer trade credit, make sure you’re managing that, and you’re getting paid on time and in full. Delayed payments from your own customers are often a huge, hidden expense. Ensure you’ve got fast and easy access to additional sources of funding, especially in volatile times like this. That will really help you maintain business momentum and continuation, even when your turnover’s fluctuating.
Look at companies like ourselves, Lulalend, which could offer you access to additional funding within a day, or even offer you lines of credit, business credit, where you have an approved amount of funding available to you instantly. You don’t need to reapply each time.
If you have a bank overdraft, that can be a good source of that additional funding as well. That’s critical to act as your contingency plan and give you the liquidity you need.
AMANDA VISSER: Given what you’ve just told us, Tom, why is it so difficult for smaller businesses to get it right?
TOM STUART: I think there are two broad categories of reasons why managing cash flow is so challenging for SMEs.
The first is down to a ‘knowledge and tools’ issue. Many business owners and entrepreneurs, quite rightly so, are not accountants or financially skilled. It’s not their strength. And in many cases, they are growing businesses and haven’t had the chance yet to bring in that skillset to the business. There isn’t that financial knowledge and skill within the company to really manage this effectively.
And, related to that, many of them are not using the right technology or the technology that’s available to help make this easier. There’s actually a lot of online dashboards, online accountancy integrations, the likes of which are Zero and Sage as some of the more well-known brands. The tools and technology these companies offer make it very easy to keep track of and manage your cash flow all in one place.
The second reason why many businesses struggle with managing cash flow is it’s incredibly difficult for small businesses in South Africa to get access to additional funding. A recent TransUnion survey of 10 000 small businesses in South Africa showed that for over half of them the number one barrier to growth was access to funding. As I have mentioned earlier, access to that additional funding is critical for managing cash flow. This is caused primarily because the big traditional lenders, the banks, are either unable or unwilling to really service the SME funding need there exists in the market.
AMANDA VISSER: What kind of assistance can you then offer small businesses?
TOM STUART: Lulalend exists to help SMEs manage their cash flow, and a primary way of doing that is giving SMEs real-time access to funding. That’s where we believe that, ahead of anyone else, we can really help SMEs manage their cash flow challenges. We provide a really fast and easy way for SMEs to overcome that number one hurdle of additional funding that’s needed, to either properly take advantage of growth opportunities, or to act as bridging finance to see [them] through some difficult times.
Whereas many traditional lenders will assess the risk of a small business based on the value of their assets, we, through our proprietary AI-driven risk-assessment technology, are able to get a better view of a business’s health, looking at their cash flow rather than the value of their assets, and provide funding off the back of that – and doing so responsibly as well, without over-indebting businesses. That’s one way we can really help businesses with their cash flow.
The other is we have, for those businesses who operate in the B2B space and have to offer trade credit – which I think over 70% of B2B businesses have to do because that’s how you build up your customer base – we have a product called LulaPay which allows these businesses to receive payment instantly from ourselves for the invoices. We will then offer those customers of the business up to three months to pay off that invoice. This helps those businesses manage the risk and the hassle of collecting against that trade book. At the same time, it gives them the opportunity to get paid immediately and still offer their customers terms.
Those are two examples of where we’ve created products that specifically address some of the more common cash flow challenges that businesses are facing in this space.
AMANDA VISSER: Thank you. That was Tom Stuart, chief marketing officer of fintech lender Lulalend.
Brought to you by Lulalend.
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