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Taking control of cash flow in a recession

By November 10, 2022Articles

Managing cash flow can be challenging for small and medium businesses, and that is particularly true during a recession – which South Africa is facing at the moment. It’s not all doom and gloom, though. With some smart choices and adjustments, your business can continue to operate, and even thrive, during a recession. Here are our top five tips for taking control of your cash flow during a recession.

Make the most of invoice deadlines

When cash flow is tight, prioritising the order of payments due can make a big difference. Paying invoices closer to the deadline means you have more control over working capital. For many companies in South Africa, payment terms are on 30, 60 or even 90 days from invoice; however, some suppliers may require payment on invoice. By prioritising payments according to their due date, you can improve your cash flow.

From a supplier perspective, you can review your own invoicing deadlines. Shorter deadlines mean quicker payments, but could also lead to fewer customers; longer deadlines can negatively impact your cash flow, but be an incentive for more customers to use you. Find the right middle ground, with an optimum number of customers who are able to meet a reasonable deadline that keeps your cash flow healthy.

Top tip: When developing your order of priorities, remember to keep supplier relationships in mind. Smaller operators or individuals often operate on extremely tight margins, and delayed payments can cause them serious challenges, which could impact your working relationship.

Negotiate better terms

Whether you’re a buyer or a vendor, or both, there are always ways to negotiate better terms with your suppliers and customers. Firstly, as mentioned above, you can negotiate better invoicing terms and deadlines that help you manage your cash flow. Next, you can discuss potential discounts, such as bulk buying or volume discounts, or rebates for early payments.

You can also negotiate contracts with both suppliers and customers that guarantee cash flow over a predetermined period. Repeat business, retainers and continuous supply can be a massive boost for any small business.

Top tip: payment and billing terms are a two-way street. If your suppliers are willing to negotiate better terms, you need to be willing to do the same for your customers. Being open to offering as well as receiving better terms will only benefit you in the long term.

Revise your expenses

Cheaper may not necessarily always be better, but that doesn’t mean that revising your expenses and suppliers isn’t worthwhile. South Africa is a country of entrepreneurs, and there are new businesses opening all the time. Shopping around to compare your current suppliers’ prices, terms, products and services to those offered by other players can help you improve your supply chain and cash flow at once.

When it comes to business expenses, reviewing what purchases are essential and which aren’t can help you reduce your expenditure and improve cash flow. For example, many small businesses discovered, during lockdown, that they did not really need expensive offices to operate and that employee productivity remained the same working from home. This led to significant cost savings on rent, consumables, electricity and so on.

Top tip: Be thorough when reevaluating suppliers and expenses. Don’t merely look at the bottom line; compare everything from price to service delivery expectations, weigh each expense on its benefits, and don’t cut anything that could potentially make things challenging for your business or employees.

Update your cash flow forecasts

We say this often, and that’s because it is a crucial step in maintaining a healthy business with a good cash flow. Cash flow forecasts are something your business should engage in frequently and regularly, as things can change rapidly. Review trends within your business as well as the industry that you operate in to get a clear picture of what’s affecting not only your cash flow, but your competitors’ as well.

Cash flow forecasting can be one of the most powerful tools you use to keep your business thriving. It helps you understand where you are, what your prospects are, and what you need to do to rectify any problems, both current and potential future challenges.

Top tip: Make cash flow forecasting part of your business routine. Whether you do it monthly or weekly, have a system in place and keep up to date with it. It’s a habit that can fall by the wayside, especially in small and micro enterprises, when dealing with so many other daily tasks and challenges, but it is critical for understanding where your business is and how to move it forward.

Use technology to your advantage

Fortunately, South Africa is not a country that relies on cheque posting to settle accounts and invoices. For the most part, South Africans prefer to pay with cash, card, or electronically. While cash and card payments are immediate, and therefore instantly affect your cash flow, electronic payments will only affect your balance once they happen. Thanks to a fairly robust online banking system, as well as multiple cash wallet options, technology is on your side as a business owner.

With South Africa’s Rapid Payments Program waiting in the wings for widespread release, there will soon be even more payment options available to SA consumers, everything from WhatsApp payments to regular debit orders. The savvy business owner will be planning to integrate as many payment methods as possible into their collections (and expenses) systems.

Top tip: Using a debit order management company, such as Three Peaks, can help you bypass the need for any technological investment. Operations like ours are actively working to make the RPP process as smooth as possible, and give you the tools to proactively ensure your cash flow remains uninterrupted.