Despite being pertinent cogs to economies of developing countries and other economies, offering employments and jobs creation, Small and Medium Enterprises (SMEs) are faced with many challenges one being difficulties in managing cash flow which may end up causing their collapse within the first few months of operation.
According to a 2014 research by Ms Avika Mungal, Lecturer, Department of Management Accounting, Faculty of Accounting and Informatics, Durban University of Technology, South Africa on Cash Management Challenges of Small Businesses in a Developing Community, one aspect that keeps small business owners awake at night is the management of cash flows with nearly 71 per cent of such businesses experiencing cash flow problems.
The research which targeted small retail businesses in the Tongaat area in KwaZulu-Natal, South Africa further indicates that the biggest mistake SME owners make is confusing profits of the business with the cash flowing into the business with lack of bank accounts, bad debts and lack of cash budgeting among other key problems.
For Dickson Mulli, CEO of Synergy Solutions Kenya Limited, a company that deals in real estates, Milele Fresh dairy products, agribusiness consultancy and more, difficulties in managing cash flow by most SMEs is a common challenge but a smart approach to it is what creates the difference.
“We as a company have faced financial problems here and there since December and the COVID-19 pandemic has even made it worse as there are 30 per cent cases of defaults in payment by our clients generally due to these tough economic times,” said Mulli.
“Wwe have since decided to changed our approach by selling less on credit and employing pay-on-cash policy where we encourage our clients to pay cash upon delivery of goods and services.”
This, according to Mulli, may not go well with some clients as most of them are interested in a longer credit period so that they may use the money to reinvest in their businesses, make profits then pay later unaware of the effect they impose on the supplier.
“Some clients lie on their financial status and when you become strict on cash payment upon delivery, they become reluctant doing business with you and sometimes you may lose them.”
Since late payment causes delay in the company’s settlement of its bills, sometimes Mulli opts for internal borrowing from the company’s savings account or negotiate the best rate of payment by clients whose debts seems overwhelmingly big.
“Because shutting down is not an option, we always call some of these clients for an arbitration meeting where we suggest to them a moderate payment percentage over a given period over which we continue doing business with them and we have seen this work well,” he said.
Since SMEs operations greatly depend on the owner, he advises that such businesses should have about five accounts that include revenue collection, paying creditors, savings, recurring expenditure and reinvesting accounts.
“Even at that, business owners should be careful to draw money from any of the accounts for personal use, paying all staff before earning their share and avoiding spending more than a third of income just in case of any eventualities,” advises Mulli.
Some SMEs like Viffa Consult Limited which deals in consultancy, business process outsourcing, research and analytics to other companies diversify their sources of income as one of the ways of managing their cash flows and late payments from clients during these tough economic periods.
According to Victor Agolla, the company’s managing director, it always occurs that two in ten of their clients pay late and the late payments affect staff salary, office rent, taxes and other statutory obligations.
“Since we know that late payment by clients is almost unavoidable, we have diversified our sources of income by dealing in a number of income-generating activities to raise additional funds besides tightening credit policy by asking bigger deposits of 80 per cent and offering discounts to cash buyers,” said Agolla.
He says in case of problems in cash flow and late payments causing even the loan market becoming expensive and unsustainable, decision to lay off staff and moving to smaller offices are other ways of bouncing back.
Nevertheless, other SMEs strictly abide by their basic budgets and allocating an emergency fund to avoid any future complications as they believe that the lack of proper planning represents a central problem that affects business growth, profitability and sustainability.
Edward Mbogo, Operations Lead at Myride Africa, a company that deals in public transport system, says late payments and cash flow difficulties are always there but being obedient is key.
“Late payments will always be there even from big players. We do get them once in a while but when changing our priorities and adjusting the budget by using cash meant for something else in a different docket all must be done following the company’s procedure,” said Mbogo.
To him, late payments and poor management of cash flows have always thrown the company off-target ending up in debts, however, having an emergency fund and also doing strict agreements with clients in matters payments avoid such inconveniences.
For Crest Fine a Kenyan company that makes and distributes bread, it was forced into asking clients to pay for the products before delivery after accumulating debts amounting to Sh100,000 a day.
“When faced with late payments, we have to find other sources of funds such as bank loans in order to be able to meet cost of operations. Due to their frequent occurrences, we have had to take measures in order to mitigate them; we outsource debt collectors who we pay a percentage of the fee when the debt is recovered and paying before the service,” said Alex Ndungu, the Managing Director of Crest Fine.
he says that with the expected new normal situation post COVID-19, the majority of small business ventures would require some external funding at some point in the business with banks being the first option many would approach in order to bounce back.