The cashflow playbook

René Botha, regional investment manager at Business Partners Limited

For South African business owners, particularly those in sectors hard hit by fluctuating demand, maintaining a healthy cashflow can be difficult. Yet with rising operating costs, and tighter access to credit, effectively tracking cashflow has become key to keeping a business afloat.

“Cashflow is the lifeblood of any business,” says René Botha, regional investment manager at Business Partners Limited. “While profits are important, unlike cash flow, they don’t always reflect your business’s immediate financial health. By focusing on cashflow, business owners can ensure they have the liquidity to meet their obligations, even in tough times.”

Botha shares five key strategies for tracking cashflow effectively:

1. Conduct regular forecasts

One of the most effective tools in managing cashflow is the ability to predict it. Botha urges businesses to conduct regular forecasts to anticipate potential shortfalls and identify periods when cash might be tight. “A detailed cashflow forecast gives business owners a glimpse into the future, allowing them to proactively plan for upcoming expenses and make the necessary adjustments in order to mitigate any financial constraints,” she says.

A cashflow forecast should ideally cover at least three to six months ahead, depending on the business’s operating cycle. It should include all expected income, such as sales and other revenue streams, and all outgoing expenditure, including rent, salaries, supplier payments, and loan repayments.

2. Monitor payment terms and collection cycles

Timely payments from clients and customers are vital to maintaining a healthy cashflow. “Delays in receiving payments are one of the most common causes of cashflow problems,” notes Botha. “It’s therefore crucial for businesses to establish and enforce clear payment terms and actively manage their collection cycles.”

This can be done by implementing strict invoicing procedures and encouraging early payments. “Automating invoicing systems and sending reminders can greatly reduce the time spent on collections. Also, consider offering discounts for early payments or charging penalties for late payments to encourage prompt settlements,” Botha advises.

3. Reduce unnecessary expenses

In challenging times, every rand counts. Botha emphasises the importance of trimming the financial fat without compromising the quality of goods or services. “Cutting back on non-essential costs can free up cash that can be redirected to more pressing business needs.”

This may involve negotiating better terms with suppliers, seeking alternative vendors, or finding ways to operate more efficiently. She suggests conducting a detailed review of all business expenses to determine which ones are essential and which can be reduced or eliminated.

4. Maintain a cash buffer

“As unexpected costs can arise at any time, a cash buffer is essential for weathering the storm,” says Botha. She recommends that businesses aim to maintain at least three to six months’ worth of operating expenses in cash reserves. “This cushion can provide much-needed breathing room if revenue slows or if unexpected expenses crop up, such as equipment repairs or urgent stock purchases.”

Building a cash buffer during tough economic times can be challenging, so businesses may need to do this incrementally. Botha suggests setting aside a small portion of profits each month into a reserve account, which can gradually build up over time.

5. Utilise the latest technology

In today’s digital age, business owners have access to a range of tools that can simplify cashflow management. Botha encourages entrepreneurs to make use of cloud-based accounting software and apps designed to track income and expenses in real time. “The right tools can help you stay on top of your financial situation without the need for complex spreadsheets. Many platforms offer features like automated invoicing, expense tracking, and cashflow projections, making it easier to manage your finances.”

Botha concludes by reminding business owners that cashflow management should always be a priority, not just during crises. “Businesses that actively manage their cashflow are in a better position to ensure long-term sustainability. It enables them to adapt quickly, seize new opportunities, and respond to any challenges that may arise.”