OPINION: Arguably, strong cash flow is also crucial for sustained growth as it enables greater flexibility.
Part two of this series spoke to the importance of establishing and implementing a business model that is both functional and adaptable to socio-economic change. It also covered the centrality of business development and asked, “what’s next?”
Part three references findings from the Business Partners Limited’s Small and Medium Enterprise (SME) Index for the second quarter of 2021 measuring the attitudes and confidence levels of South African SME owners.
The survey pointed to insufficient cash flow and lack of funding as major challenges for South African SMEs and often results in the failure of a venture.
The issue of finance is more convoluted than many entrepreneurs realise. Let’s explore this issue in more detail:
1) The inability to maintain and sustain a healthy cash flow
The term, “cash flow” refers to the cycle that money undergoes on its way in and out of a business. For SMEs, it’s often a make-or-break factor. Maintaining a healthy cash flow allows a business to respond quickly when meeting unexpected challenges.
As an example, consider the impact that the recent spate of riots had on the cash flow of SMEs across the country as some were robbed of their stock and were unable to trade. Arguably, strong cash flow is also crucial for sustained growth as it enables greater flexibility. However, there are a few common mistakes that SME owners make with regards to cash flow, outlined below:
Overestimating future sales There is an adage in the investment community that rings true for SMEs: “Past performance is no guarantee of future performance.” A sudden upsurge in sales volumes can lead to business owners becoming overly optimistic and spending too much of their available cash on buying more stock, marketing or paying suppliers.
This is where realistic forecasting becomes indispensable.
When forecasting future sales, it’s imperative that business owners consider all contributing factors and don’t base potential earnings solely on past performance as this could land them in trouble.
There are a wide range of factors to consider including market activity, competitor performance and rate of innovation, the country’s economic climate and changes in client demand.
2) Lack of financing
As the SME Index reveals, 50 percent of SME owners deem access to finance for the growth and sustainability of their business as vitally important.
In previous columns we’ve mentioned how important it is for the public and private sector to work together to build a socio-economic environment that is conducive to entrepreneurship, particularly since small businesses are key
contributors to the country’s GDP. It’s important for aspiring entrepreneurs and start-up owners in their first few years of business, to remember that business finance can come from a range of sources, many of which are sometimes overlooked due to lack of research.
Below is a list of some of the forms of financing currently available to South African business owners:
- Business loans from banks and financial institutions
- Business loans from independent firms like Business Partners Limited
- Venture capital investment and angel investors
- Government grants
- Business credit cards
- Bootstrapping (or self-funding)
The most important first step for any business when considering funding, is to construct a comprehensive business plan.
These plans should include a company’s mission statement, a description of their value proposition or unique selling point, and an outline of their product or service.
More pertinently, a business plan needs to include high-level growth plans detailing the ultimate vision for the business and how this will be made possible through capital investments, resources, time and energy.
The more comprehensive a business plan is, the easier it is to identify a financier best suited for your business and the more accurately projections can be made around what is needed for the company to flourish in its crucial first years.
This article is the last in a series of three articles that unpack why SMEs fail and how to circumvent some of the most common issues.
* Ben Bierman is a managing director at Business Partners Limited.
** The views expressed here are not necessarily those of IOL or of title sites.