SMEs should manage and invest cash reserves wisely
DURBAN - One of the most common cash flow management mistakes that small businesses make is inadequately investing their cash reserves.
Vaughan David, Chief Executive of Business Cash Investments at FNB, says managing your SME business' cash flow is not just about maintaining revenue levels and ensuring that money owed is collected timeously, it is also about managing your cash reserves and balancing the risk of any investments you might make.
He shares three important factors that SMEs should consider when investing cash reserves:
A key principle of investing is limiting risks by spreading investments across different instruments and products in order to cater for short and long-term business needs.
Determine what percentage of your cash reserves you require instant access to, for unexpected expenses or cash flow management and then deposit those reserves into an account which can give you instant or quick access to your savings.
It is recommended that a portion of the reserves are invested for the long-term, for capital expenditure, planned repairs or future expenses etc. There are a variety of investment accounts that businesses can opt for depending on their unique needs.
"Given the number of investment products available in the market, investing reserves can often be confusing for entrepreneurs. Therefore, it is advisable to seek the assistance of a banker who can conduct a holistic assessment of the business and make recommendations," said David.
Daniel Goldberg, the co-founder of Bridgment, a fintech company, said that small businesses can survive a cash-flow crunch, but one wrong move could sink them.
According to Goldberg, nurturing good business relationships like being in good terms with suppliers and having a rainy day fund, a cash reserve of at least three months' of of expenses are just some of the ways that SMEs can manage their cash flow effectively.
Challenges that SMEs face
According to the SME Landscape Report An Assessment of South Africa's SME Landscape: Challenges, Opportunities Risks and Next Steps 2018/2019 funding for SMEs was identified as a major stumbling block.
The report said that only six percent of SME owners indicated that they have been recipients of funding from the government. The top three sources of government funding were government grants (21 percent), the Department of Trade and Industry (17 percent) and the National Youth Development Agency (16 percent).
50 percent SME owners that said that they received non-government funding said the they sourced the funding from and/or from friends and family. This was followed by business incubators (24 percent) and the big banks (20 percent).