13th May 2020
Onkabetse Morapedi, Head of Enterprise Banking, Stanbic Bank Botswana
As businesses across the world continue to come to grips with the “black swan” event that is COVID-19, it has become clearer than ever before that our “new normal” shall be business “unusual.” Fortunately, agility was always an inherent need in business, and we have the tools amongst and around us to help ensure not just survival through this storm, but stronger and more resilient business into the future.
A survey recently conducted by Tsinghua University and Peking University estimates that 85% of SMEs in China will run out of cash within 3 months, and two thirds will likely run out of money in two months; this is of course if the pandemic does not slow down. One of the most common challenges to ride in this short-term wave, and indeed in business general, is that of cash flow management. Here, we share our top 3 tips for cashflow management and planning for small and medium businesses.
- Move your focus from income statement to the balance sheet
Most typically, business focus on profit and losses – this sees a focus on growing the top line while managing the bottom line, as it were. During this period, however, we need to focus on cash-to-cash conversion cycle; i.e. shift focus from the income statement to the balance sheet. This means taking a closer look at payables, receivables, and inventory, and doing so in close coordination with each other.
- Revisit variable costs and capital investment plans
Reducing variable costs is often a much quicker way toimmediately reduce cash outflows than focusingon fixed costs. One example of this is on staff and talent – and does not mean consideration of cuts or retrenchments, for this is something we all need to avoid. Rather, look for opportunities to reduce contract–labour (freelancers engaged, consultants, etc.) and re-distribute work to the permanent, full-timeworkforce. Encourage employees to take available leavedays so as to reduce liabilities on the balance sheet, for those happy to take voluntary, or even involuntary, leave without pay, explore this in order to preserve cash. Ensure you comply with all labour and other guidelines specific to your industry as well as generally applicable to all businesses in Botswana. With your cash flow forecasts top of mind, think about what is and what is not a necessary capital investment in the short-term. What can you put off until later, until the situation improves? Equally, are some capital investments more necessary now to gear yourself up for better business as we weather this storm?
- Extend payables and expedite receivables
One way to preserve working capital is to take longer to pay your suppliers, of course, within reason. Can you get terms or a payment holiday of any form? Work with your suppliers to establish a mutually beneficial agreement. Your customers may be looking to delay their payments to you, just as you do with your suppliers. Balance here is what is key. Ensure timely and accurate invoicing, no billings errors, that your paperwork is in order, and you are wholly familiar with payment trends and practices of your clients especially if these are changing due to the current situation.
Cash flow management can be as tricky or as simple as you make of it. The key is to find balance, be firm, and be vigilant. To maximise working capital, you cannot, for example, only focus on your own operations – rather, you need to think about your entire business ecosystem and its supply chain. Think of and engage your clients, your suppliers, and your operations and workforce. What impact do they have on you, and vice versa? And how can working smarter help your protect your business’ future as well as safeguard its reputation?
These are just a few things to think about, but important factors to help give you and your business a fighting chance in this period of business unusual.
*These tips are part of a financial literacy series by Stanbic Bank Botswana
