Three Ways To Effectively Manage Cash Flow by Small Businesses

On Wednesday July 12, one of the top FMCG in Nigeria – Cadbury Nigeria PLC. – announced that it has temporarily halted the production and sale of its Cadbury Bournvita Biscuit due to complaints about its high price. The product was introduced into the Nigerian market in November 2022, and some 8 months later, has been withdrawn from the market as distributors hint that the high price is hindering sales.

For those who are just hearing the story, here’s the shocking part.

The biscuit in question is available in two consumer pack units containing six and ten cookies, priced at N60 and N100 respectively.

The next question is – if products costing N60 and N100 are described as expensive, what does that tell you about the market?

Cashflow is low. When consumers have less cash, they cut down on their spending.

And when cashflow is low, the first businesses to be affected are the small businesses, as they do not have the economies of scale advantage the medium and large-scale businesses do.

As an entrepreneur, this is the right time to build a cashflow management strategy if you have not done so in the past. Keep in mind that the cashflow management strategy will be a key determinant as to which businesses go under, and which ones stay afloat and profitable.

Here are some tips you may consider to effectively manage your cash flow.

Budgeting & Forecasting

This may be the most over-flogged tip in the history of business, but it is a valid one. Times of low cashflow are the times to work strictly with budgets. Once you have a clear idea of when and how your revenue flows in, you need to budget the outflows in line with it. Make a budget for everything.

When you combine this with forecasting, this is what you get.

• First estimate or forecast your revenue and expenses for a period of time. Let’s say 3 months.
• Next, Allocate funds to the core expenses first, and then to others.
• Next, identify your expendables. What are those things you can do without in the event that you get less revenue than you projected
• You can even take it further by anticipating ways to cut down on the expenses, or activities that may increase your revenue.

For a small business, Budgeting and Forecasting are essential for operating at peak efficiency.

Negotiating payment terms with Suppliers and partners

Sales may slow down in these times, and if you are looking to improve and optimise cashflow, then you may need to renegotiate payment terms with vendors. Your negotiation will be dependent on what you want to achieve. Are you looking to expand your operations or do you want to free up a little capital for a new product launch?

In this case, You may want to make slight modifications to the payables schedule so that you give your cashflow some breathers. Before you start this renegotiation, take time to go through your existing agreements, and be sure to check for cancellation clauses and penalties. Instead of waiting till you default on payments, be proactive and let them know if you want some days added to the current payment schedule.

Make sure to get a win-win solution and offer something in exchange for better payment terms.

Optimizing working capital.

A core part of your job as an entrepreneur is to manage and even optimise your working capital. If you have a CFO or someone else in charge of your financials, it may reduce your job considerably, but the buck still stops at your desk. The key tip here is to optimise working capital so that you are not forced to go a-borrowing to meet short-term financing needs when you have idle cash stuck in something that may be a long-term need.

Make all efforts to decrease your outstanding accounts receivable, so that you have cash to run the day to day operations. You should also optimise your billing processes so that payments can be seamless. You may also need to reevaluate Slow-moving SKUs, as they are often a source of hidden working capital losses and absorb warehouse space with maintenance costs. The idea is to keep turnover high, and the cash flowing through the entire cycle.

Here’s a bonus tip.

Like other small businesses, you may be reconsidering your pricing in line with the new economic realities like increased cost of operations. If you have to review your price upwards, it could be a great idea to offer a little extra value to the buyer. It may be some aftersales value or presales, but if the buyer feels like they are getting a little something extra, they may be less resistant.