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We all know the old saying – “Revenue is vanity, profit is sanity and cash flow is reality”, but the last six months in particular have reminded me of how true this saying is. If we don’t consider and manage cash flow well as small business owners, we may end up in sticky situations that result in a myriad of implications. These implications may include the inability to pay bills, salaries, and the lack of operational money to ensure the machine operates smoothly.

This week I am hoping to share some of the lessons learnt and good practices to consider on cash flow that may be of value to your small business.

Know your numbers

It is imperative to run a monthly cash flow prediction.  We in fact have a practice in the business where we have a rolling twelve month cash flow view. It isn’t always pretty but it is critically required to enable us to plan for the difficult months. It helps so much to provide focus on whether we need to sell more, spend less, or both.

Get your bank to trust you in the first year

Your conduct of running your bank account in the first year is critical. Critical in so many ways, as looking at how you conduct your affairs is the way your bank manager gains confidence in your business. Confidence in how you manage the relationship with them and how often you communicate with them, in the good and the bad times. Confidence in steady revenues coming in that will aid your credibility even further. If there is one thing you have to do in your first year, it is to keep your business bank account solid and clean. By solid I don’t necessarily mean high revenues – I mean solid in terms of consistent inflows and prudent management of the account. You never know when you need an overdraft, and a clean bank account in year one will greatly assist in this regard.

Don’t confuse your VAT collections and tax money as cash

If you are VAT registered you will be collecting VAT on behalf of the Receiver of Revenue, however, you will only pay the money to the Receiver every second month. When you look at your cash flow ensure that you do not consider the Receiver’s money as your own, as it is not. Consider it as money that was not yours to start with and put it into a separate account where you can earn interest on it, until you are ready to pay your VAT every second month. Penalties of not paying the Receiver of Revenue are severe, and the impact on your tax clearance certificate will be real. The Receiver of Revenue really wants to receive his money!

Don’t underestimate the impact of VAT once you have billed it

If you are into your first year of trying to manage VAT payments and receipts, you will know that once you have invoiced for VAT, you are liable to pay it to the Receiver every second month, regardless of whether or not you have received payment from the client. Consider this when you are collecting outstanding debts,  and make sure it is within your collection cycle before you have to pay the VAT, as you will be carrying the load of cash flow implications otherwise.

Identify your ‘big spend’ categories and manage those closely

When you are tight on cash flow, ensure that you have your ‘big spend’ categories under control first. Focus on the most critical spending categories, as this is where most of your cash goes. Invariably the big categories include salaries, raw materials (for manufacturing concerns) and rentals. The point here is that you should not reuse envelopes and write on the back of printed documents to save paper which will save you all of R100 per month, when you can manage higher spend categories and make a real impact on cash flow. Unfortunately you are in a business of running a business, and sometimes you have to make tough calls.

We hope these simple tips will help you in managing the real impact of cash flow issues on your business. Cash flow management has never been as clear to me as what I have experienced in the last six months. I now understand what my accounting teacher tried to teach me back in high school!