8 ways small businesses can maintain financial health in an unhealthy economic environment

Jeremy Lang

As South Africa’s newly appointed Finance Minister Malusi Gigaba continues to engage with international investors in an attempt to salvage the country from a third credit rating downgrade, local businesses brace themselves for the inevitable ripple effects caused by a low growth economic environment and the increased burden placed on domestic banks.

Jeremy Lang, regional general manager at Business Partners Limited (BUSINESS/PARTNERS), says that in order to maintain their financial health in this challenging economic environment, South African businesses – particularly small and medium-sized enterprises (SMEs) – need to stay on top of their financial information and proactively manage their relationships with debtors, creditors and funders.

“As local businesses will now likely face greater challenges in obtaining and servicing loans, the ability to keep up to date with financial obligations and payments will, for many, become strained. This will further hinder the promptness of business-to-business (B2B) payments – of which, late payments already negatively impact 48% of South African small business owners1.

“Thereby, knowing these risks, local business owners should be putting measures in place to maximise cash flow and ensure efficient management of the working capital cycle. This is key if businesses want to maintain the financial health of their business.”

Lang explains that this is particularly important for SME owners who may not have the financial reserves required to absorb the costs and implications that arise from debtors’ late payments. “Smaller businesses regularly rely on their payments to come in on time to be able to pay their overheads, which include their supplier, salary, and rental payments. Late payments can therefore put these businesses under extreme pressure with regards to principal obligations such as keeping to suppliers’ credit agreements, paying staff on time, and upholding their rental agreement.”

To limit the impact of late payments, Lang offers the following eight tips to SMEs:

1. Spread the risk: As big corporate businesses and government institutions are prone to being late payment culprits, it’s advisable to avoid being too heavily reliant on a few core customers of this nature, where possible.
2. Vet customers properly: When giving customers payment terms, it is important to establish both credibility and reliability. This can be determined by performing thorough due diligence on potential clients, checking credit records and obtaining references from previous business associates.
3. Manage debtors and offer discounts: Employ a dedicated, adequately trained member of staff to deal with the collection of money and to follow up on late payments. For customers that are frequently late, consider reducing their credit terms, even if just temporarily, until they find a way to pay more timeously. Offering customers a discount on early settlement will incentivise them to pay as early as possible, however, discounts should only be offered to the extent that a business’ margins allow.
4. Encourage cash sales: A healthy balance between cash and credit sales can be beneficial in challenging times as cash sales will guarantee a certain level of liquidity in the business.
5. Build up and maintain reserves: By having adequate cash flow reserves and facilities in place in case of a “rainy day”, a business will be able to stay afloat for a few months in the event of late payments.
6. Implement efficient admin systems: To avoid documents, such as invoices or contracts, being returned due to incorrect submissions, ensure the business’ administration procedures are efficient, thorough and free from errors. Even the smallest error can result in lengthy processes and payment delays.
7. Balance the working capital cycle: Businesses need to manage their working capital cycle effectively by ensuring they have adequate stock holding in place. This can be a balancing act, as too much stock will tie up cash, while too little may limit a business’ ability to sell.
8. Proactively manage relationships with financing partners: Establishing a good relationship and track record with a financing partner / bank manager is important as they essentially become a stakeholder in the business and, if continually updated and treated well, will advocate on the business’ behalf. 

Lang concludes that if small business owners are to establish and maintain a healthy credit history and track record, it is essential to adhere to the terms and conditions set by their financing partner, as well as those agreed upon with debtors, creditors and other funders. “It is important to remember that the vetting process works both ways. So if, for whatever reason, a business owner is unable to honour a financial commitment, it is in their best interest to make sure that they proactively communicate that as early as possible, along with an action plan of how they’re going to resolve the issue.”