Small businesses are the drivers of any economy. In our opinion they are the mainstay of capitalism / societal economic development, creating wealth while closing the employment gap in the society. However, as much as a great number of small businesses exist in the developing world, a huge percentage of them barely succeed owing to several inhibitors. And even when some of them succeed, they barely grow beyond mum and pop level mainly because of omission of some “common sense” secrets that are not necessarily taught in schools but one has to pick up along the way. It is for this reason and more that we will be sharing some nuggets to help small businesses not just to survive but to thrive and attain their full potential.
Let's talk about Cash in this article.
As a small business owner, you probably would have heard the phrase "Cash is king" enough to the extent that it now bores you. But you see that short three-worded sentence? It is a life saver. CASH IS KING. It is like the blood of your business. Just as one of the easiest ways to kill an animal is to cause it to bleed, same way one of the easiest means to eliminate a business is to drain out cash. Never allow your business to run out of cash. At every point in time cash flow into your business must exceed cash flow out of your business.
A business can be profitable, yet cash-strapped. Do not get it twisted. Profit is what is left after deducting your business costs from revenue, while cash flow is the amount of money flowing in and out of a business at any given time. Profit is more indicative of your business's success, but cash flow is more important to keep the business operating on a day-to-day basis. So how can a business be profitable yet cash-strapped? Such can happen when a business extends credit to its customers (debtors), without paying attention to its own creditors. If the “debtor days” described as the average number of days that pass before its debtors pay, exceed the "creditor days" which is the average number of days a company allows to pass before its creditors are paid, the business can be profitable on paper but cash-strapped in reality, truncating its day to day operations and leading to its demise. This is one reason your business needs an accountant / accounting software?
Mr G was running a small venture in a thriving metropolis in Nigeria. Among his peers he was evidently doing very well for himself. His business involved distributing popular brands of a few well-known Fast-Moving Consumer Goods companies, and he had solid infrastructure and a bustling network to deliver superior coverage of the metropolis. As his business prospered, he went into a frenzy of acquiring fixed assets for his business, as well as properties for himself. He acquired a parcel of land in a choice location and started building a massive warehouse with the objective of expanding his business. The warehouse investment was particularly dear to him as he felt he was reinvesting in his business. In addition he was expanding into more distribution partnerships, breaking more barriers and taking on new frontiers. However, he was doing all of these at a faster pace than his business could generate the cash for. He had his way of running the numbers for his business, and through his own lens his business was still profitable. The only slip was that he was not able to see early enough that he had put so much pressure on the cashflow of the business. Of course, he was acting against all the advice he was getting from the Account managers of the companies he was partnering with. Before long, his business started struggling, gasping for breath. He could barely meet up with his payment commitments with his creditors. Things were falling apart. He was forced to go to the banks for loans. Again it was a wrong move at the time as rates were not friendly, and beyond what his business could cater for conveniently. It was a vicious cycle. It took a lot of renegotiation, extension of credit and loan facilities, disposal of assets to fund the business, time, and emotional/psychological strain to restore the business. Something that could have been so easily avoided.
For many of the small businesses, this is a common pitfall. You need to be careful not to be a victim. It is particularly more predominant in a certain geopolitical zone in Southern Nigeria, as they are culturally most obsessed with land / property acquisition.
Never prioritise fixed assets or expansion above cash. Cash is king! And you have to commit to pacing every operation and financing activity within your business in line with it. Don't bite more than you can chew- opportunities are limitless while finances are limited. Don't stifle cashflow in a quest to expand. As a bonus, consider extending this to your personal life. You would be grateful you did.
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