DINEO TSAMELA: The intense job of managing a business's working capital
When it comes to managing a business, plenty of entrepreneurs focus on funding, but few integrate capital into their business effectively.
This is why cash flow and working capital management are important to ensure your business runs smoothly.
The saying "cash is king" isn't just about being able to pose on Instagram with a stack of money and a crown emoji.
For entrepreneurs who work with inventory, managing your working capital is all about managing short-term obligations: business owners need to ensure that they have sufficient cash to carry out their daily operations.
Business owners need to keep a close eye on their inventory levels, their short- and long-term debt obligations as well as the credit they give their customers.
Central to effectively managing your working capital is to ensure there is a balance between the time it takes the company to pay for and receive inventory and the time it takes to sell the inventory.
This is known as the cash-conversion or operating cycle, and you need to understand the cycle that applies to you.
What cycle you're in depends on how quickly or how slowly you sell your stock. Not all products move at the same time. A business that supplies necessities will most likely move stock a lot quicker than a business that sells luxury items.
Longer cycles will mean you need more cash reserves. This is because there is a much greater gap between when you receive stock and when you sell it. While you wait for sales to happen, you still need to keep the business running every day. This is also important if you're affected by cyclical or seasonal demand for your goods.
This requires the proper management of liquidity and cash flow. Liquidity is a business's lifeline. It can be affected by holding too much inventory when sales aren't going well, late payments from clients, lack of access to short-term credit facilities such as an overdraft, and too many debt obligations.
There are several ways that business owners manage the movement of cash in their business:
• Collect monies owed to the business. Offering discounts is one way to boost cash sales. It can also help when a business offers credit. You can offer customers a discount for early payment.
• Delay payments to creditors. This seems counterintuitive, but delaying payments to creditors — within a reasonable time — will help you stay liquid. A "reasonable" period would be until the latest possible payment date without you falling into arrears.
• Take advantage of short-term finance options. These could be an overdraft or a short-term loan. But be careful here — you don't want to take on a five-year loan just to be able to pay your monthly expenses. The interest paid on such a loan will end up costing you a lot.
• Discount old inventory. This depends entirely on your business, but holding old stock takes up floor space and doesn't contribute to your business if it's just sitting there. You've all seen retailers having end-of-season sales. Businesses will do this to move "dead" stock out so they can make space for new items. It also helps bolster their cash reserves.
The process of managing working capital is intense and you should not try to do it by yourself unless you understand finance very well. If not, it's better to get an accountant to assist you with managing this aspect of your business until you've got your head around it.
There are several books and online resources and courses that can also help you learn how to manage this aspect of your business.
Sites like Udemy and Coursera offer free courses on business management that you might find useful.