Business cash flow & pitfalls

BUSINESS CASH FLOW & PITFALLS

In the fitness world we are told that you need to exercise and eat right to keep your blood flow healthy. In the corporate world finance experts advise that your business must have a sound strategy & good operating model to keep money flowing. But how best do you manage the money once it starts pouring in? 

A good start is to appreciate the difference between revenue and profit. Revenue is the money made from selling your product whereas profit is what is left over after you deduct all the costs incurred in producing the product. One of the biggest pitfalls made by businesses is not drawing a line between the two and thus not using cash in an optimal manner. As an entrepreneur, it is vital that you are aware of all your expenses and have a ranking of them. Examples of critical expenses are tax, rent, utilities and wages. Not paying any of these has an adverse impact on the business. For example, not paying your taxes affects your ability to get a tax clearance certificate and which in turn will not allow you to tender for jobs. Therefore before you can draw any money out of the business to finance another business venture or buy a car for the Director, ensure that all key expenses have been paid. Once these have been met, the money left over is the business’ net profit. 

There must be a plan formed beforehand on how profits are to be used. These are either retained in the business or are paid out as dividends to shareholders. A plan on what portion of profits will be paid out is called a dividend policy; it ensures that profits are not drained out to the detriment of the business. This is vital especially in a partnership set up, to avoid disagreements. The policy is often in the form of a percentage of profits, such as a maximum of 30% of profits may be paid out as dividends.

However, before profits can be paid out to shareholders there are a few matters to consider. These include; will the business have sufficient cash reserves to continue operations? Does the business need to purchase any assets? Are there any plans to expand business operations? The answers to these questions will lead the business owner to have a working capital & capital expenditure strategy, which will guide how cash will be used. Having such a strategy in place ensures that the business has sufficient cash resources to meet its needs and to allow it to grow. A business without a strategy may find itself limiting growth of the business or taking on unnecessary debt. 

This article was originally published in The Business Weekly & Review in May 2018, co-authored by Pako Moshaga & Boitumelo Sejo.