Paying customers provide a good source of cash flow that can support business operations and growth plans. To grow revenue, a business owner can focus on harnessing relationships with return customers
BY NJOKI WAIGWA
To achieve long term success, a business must maintain a certain level of cash in hand or at bank. Most startup owners struggle to take control of their businesses due to lack of cash flow management – money in and out of a business – such that they are unable to pay employees, rent, vendors and loans on time.
The year 2022/23 made things worse for typical startups in Kenya and globally. We have witnessed massive layoffs, sale of infrastructure, business sell off or buy off, exits from markets or just shutdown. This is in spite of some startups receiving funding from investors.
As it is, now at the tail end of the year, the Kenyan economy is in a crunch, owing to the high fuel prices and ever rising foreign exchange rates. These economic dynamics tend to hit startup owners harder as they are just establishing their position in the markets and may not have stable capital base to withstand unforeseen changes in the business environment. Here’s is what a startup owner should do to manage cash flows, and stay afloat.
Viable product or service
In the digital age, many startups are tech enabled. Tech ideally requires massive investment in terms of infrastructure, finances and expertise. On the other hand, it may take time before the product development is complete, hits the market and generates cash flows enough to sustain the business. It is for this reason that upcoming startups that have failed to get investors on board for second or third round of funding, are going down.
Whether venturing into tech powered business or traditional brick and mortar business, startup owners should build businesses that prioritize cash flow. Later, when they have financial muscle, they can take up projects that take longer to generate cash flow.
It is critical to validate viability of product or service, before hitting the road, to ascertain that there exists potential customers in the market who are willing and able to pay for it. Otherwise, there maybe no cash from sales in future to support the business existence.
Paying customers provide a good source of cash flow that can support business operations and growth plans. To grow revenue, a business owner can focus on harnessing relationships with return customers. Have in place a record of all existing customers, communicate to them, update them on new product or service offerings as they are more likely to buy your good or service if they have done it before. It is also prudent to stay consistent in charting new markets. This can be through referral programs, paid adverts, social media campaigns and influencers. This ensures even with customer turnover, the business maintains some level of sales.
Cash payouts do affect the amount of money that the company holds. Initiatives such as negotiating for better deals with suppliers reduce amounts payable. Automation of work and introduction and use of technology may enhance efficiency, reducing man hours, fuel or power consumption. These initiatives reduce the cost of goods sold and the actual money the company pays out.
Cash flow reporting
This is ideally a form of internal control where the startup owner periodically looks at the cash at hand and at bank, upcoming receipts, payouts, any huge capital investments etc. It helps that the business has a good view of the financial status and no financial obligations come as a surprise.
A business should invoice the customers on a timely basis. This allows the receiving company to receive, do internal approvals for payment, and include the invoice on the next payment run, so that payment can go out. In the case that a company pays its creditors on the 20th of every month, then a business owner sends the invoice on the 21st, it means that the invoice can only be settled in 1 months’ time. For better planning purposes, this company should ideally invoice about a week before the payment is due.
Consistently following up on debt is key to maintaining a fair level of operating cash flows. It is prudent to have in place a team to follow up on debtors and provide updates. There should be proper documentation in place, like email trails, in addition to phone calls. A debt paid on a timely basis provides good cushion to the company.
Managing inventory levels.
For businesses selling goods, it is advisable to manage stock in, stock out and the quality of items stocked. Holding excess amounts of stock that needs to be paid for upfront, may mean that the business holds critical operating cash. Low amounts of stock or old stock held for a long time may translate to low sales, loss of customers and eventually low cash flow and profitability.
In the face of changing business environment, a business may not manage to meet its debt obligations. It is possible to speak to the financial institutions and negotiate payment terms. For instance, reduce monthly payment amount to release some cash to the business. Change of payment dates, to only pay on dates when the business is liquid.
Secure financing on time
Should a business owner find that they are falling short of cash, it may be wise to apply for that bank loan, Sacco loan, Chama loan or grant, way before the cash crunch happens. It takes quite some time to apply for and secure financing, this is why it is imperative to do it at the earliest.
A business thrives in a community where there is people, firms and institutions. It is great to pursue solid stakeholder relationships. For a business owner, it is possible to get a Chama loan that can boost the business if the founder is a member of a Chama. One can leverage on relationships with the bank to get faster reviews and approvals, when there is an already existing mutual business relationship. This however can only be done intentionally, from the outset of the business not when the business is in a cash crunch.
A business owner should remain dedicated to monitoring the performance of the business. Should the measures discussed above fail to assist achieve healthy cash flow, then it could be time to downsize.
Downsizing gives the business an opportunity to continue serving customers, but on a smaller scale, as it works on stronger business structures and stability. A business owner can consider, laying off workers, closing down some branches, dropping some production lines, product or service lines. This helps the business to chase operational efficiency on a small scale as it pivots itself.
Writer is an entrepreneur, finance, tax and strategy professional.