By Elizabeth Nkukuu,
Cash flow is the lifeline of any business. If a business is to grow the business owners need to put in place a good business model that ensures that they are not only selling things profitably but also, they are able to collect the money that they need to.
Cash flow management, therefore, involves managing the source of cash and the usage of cash. The main principle in cash flow management is that collect as first as you can delay the payment as much as possible as long as the delays do not result in more additional costs in terms of interest and/or relationships.
Looking at statics one of the largest challenge that most business people face is the inability to separate business cash flows from personal cash flows.
This challenge has held back businesses from growing as they might not grow since the owners are spending more or even the owners put so much cash into the business which can be detrimental to the business growth.
To help this we have seen some solutions come up one being the Safaricom solution that allows one to separate the business and personal cash flow “Pochi la Biashara”.
Despite this being there we must think of how we are to work on the underlying issues. The first issue is the owner’s mindset. When running a business that they fully own and/or control, they see themselves as one and the same with the business. It is only unless the owners start seeing the business as a separate entity that has its own life and goals this might continue to be a key challenge. The other key issue is that the owner does not get to earn from the business and so they have not paid themselves hence they have no cash to support themselves.
With this second challenge, there is the proposition from Profit First book by Mike Michalowicz and the underlying discussion is that we should aim to make a profit from each sale and also go further and ensure that we reserve some cash to ourselves as entrepreneurs to pay from every sale they make. The way to do this is by creating separate accounts for every essential function namely;
- Income/revenue account
- Founder’s accounts
- Operational expenses
The above is applicable when the businesses are already generating sales. Before the above becomes a reality, one needs to spend time looking at how best to finance the business.
Over time all the business finances need to be generated from within and grow from there, however, there are situations when we need to get outside financing.
To generate cash flow the business needs to be selling one needs to put much effort into this. On the third part financing one needs to be clear about what funding they need, that is either debt or equity.
For one to make a decision on this a couple of things come into play namely;
- The stage of the business in the life cycle.
- Most of the time new businesses cannot get debt funding.
- The knowledge of the entrepreneur plays a key role
- Desired level of control among others.
For you to get third-party capital it is important to ensure that your documentation is on point and that your business is profitable and scalable.
All in all, as entrepreneurs it is key to keep our eyes on the profitability of the business that directly translates into the cash flow into the business.
Let us aim to put in place the right structures and processes that will be key not only for growth but also to attracting third-party capital and this will include having proper books of accounts.
Elizabeth Nkukuu, Vice President of Funding and Investments, SME Founders Association. Founder, Liz Consulting.