Smart businesses are fanatic about conserving cash flow
Cash is key to the survival of any business. PHOTO | FILE
Last weekend I got a call from one of my business friends. He is one of those guys who usually call only when they are in financial distress and need urgent bail out.
Before answering the phone call, I prepared what to tell him, but was surprised he wasn’t looking for money; he wanted us to meet so I can help him with some ideas on something big he was planning.
When I met him, he told me he wanted help on how to run a promotion to clear huge stock that was holding his money so that he can pay his debts and have peace of mind.
When he told me the size of the stock he was holding I was amazed. I asked him why he bought such a huge stock in the first place.
The trouble, he said, started mid last year when a supplier from overseas visited him and offered a good deal where he could save up to 30 per cent on stock.
The only condition was to buy in large quantity and pay cash. He thought it was a good deal that would give him a good profit margin and competitive edge in terms of winning customers through discounts.
It dawned on him that he had made an unwise decision the moment the goods arrived at the port of Mombasa. He had to borrow money to clear the goods. He spent all the money and was struggling to pay basic bills.
Six months down the line he had sold less than 20 per cent of the stock. When he realised that the stock was not moving the way he expected, he made another blunder. He offered to sell to other retailers at a big discount and on consignment.
Currently his debtors owe him millions of shillings yet he cannot force them to pay because he supplied on sale or return basis. This has compounded his cash flow problems to a point where he is willing to sell his entire stock at cost if he could find a cash buyer.
This is a typical problem that many business people face. I also made the same mistake some years ago on a smaller scale but the effects were profound.
Everyone in business knows the concept of economies of scale. You simply buy more or produce in mass to reduce the cost per item and, therefore, increase profit. But this action causes effect on another critical element – cash flow.
Cash is key to survival of any business. Cash is king. Cash is critical to the life of any business.
This is why the ultimate success in business depends on your ability to balance between profit and cash flow.
A smart business person must be a total fanatic about generating and conserving cash at any given moment. Cash is more important than profit because, with cash you can buy time as you put in the right systems in place and wait for business to break even.
But without cash your vendors, your employees and your lenders will hardly give you time to turn things around.
One key mistake most people make is failure to factor in the cost of finance. For instance, when my friend was enticed to buy more stock than he could dispose to save 30 per cent, he failed to factor in the cost of interest on loan or what he was losing by keeping his money in stock rather than elsewhere earning interest.
For instance if you buy stock that takes a year to dispose just because of 30 per cent on a loan you are paying at 25 per cent interest, then you are only saving 10 per cent without factoring other cost such as stress of dealing with debtors, loss of opportunities due to cash flow problems and loss of credibility.
Mr Kiunga is a business trainer and the author of The Art of Entrepreneurship: Strategies to Succeed in a Competitive Market.
