Causes of cash flow problems include:
a. Many SMME’s in South Africa struggle to obtain credit through conventional financial institutions because they do not meet the collateral requirements. These would include assets, credit history, and financial statements. Also track record is an issue for many younger companies when it comes to accessing funding.
b. Failure to analyse financial information is one of the biggest pit falls. The reality is that businesses often get so wrapped up in running their day to day operations that they neglect to keep their bookkeeping up to date and to develop a strategic cash flow management approach that can help them avoid cash shortages and maximize income.
c. Low profits and revenue decrease.
d. Holding too much stock. The costs of holding stock include the money you have spent buying the stock as well as storage and insurance. If SMME’s are buying or producing too much stock it will have a negative impact on their cash flow.
e. Giving too much credit and being reluctant to contact customers to request payment of overdue accounts
f. Seasonal demand.
g. Bad debt.
h. Longer payment terms. Many companies that SMME’s supply to have payment terms of 45 – 60 days. This has a significant impact on cash flow.
i Increasing expenses (Fuel, electricity).
j. Sudden or rapid growth (New contract or big order).
Strategies that would help with cash flow include:
a. Accurate cash flow forecasting: Cash flow forecasting a deceptively simple process that amounts to using available information to predict how much cash you will have coming in and going out of your business at any time. A basic form of cash flow forecast would be a spreadsheet, listing income and expenses on a monthly basis, with yearly totals for each. What you need to do is be realistic, apply the definition of income and expenditure, include everything and look at as many scenarios as possible.
b. Regular preparation and analysis of financial statement information helps business managers and owners detect the problems that would impact on cash flow: these include high operating costs, low sales, poor cash management, excessive fixed assets, and inventory mismanagement.
i. Statements from different periods can be compared and this could identify patterns and make the necessary changes and budget revisions to prevent problems before they start.
ii. Keeping these records will later make the SMME bankable and make access to credit lines from conventional institutions possible.
iii. The analysis of the statements will also point out any problems around profit margins and the management there off.
c. Manage stock effectively: find balance between the costs and benefits of holding stock. Costs of stock would be the money you have spent buying the stock or producing the stock as well as the storage and insurance. The benefits include having enough stock is being able to meet the demand. However having too much stock impacts your cash flow and could mean more expenses and having to little stock will mean a loss of income. Managing stock sensibly is as important as managing cash ﬂow. Negotiate longer terms with your suppliers.
d. Keep overheads down: Every Rand counts. For a 20% mark-up, every Rand of ﬁxed costs spent unnecessarily means ﬁve extra sales are required to get to the same place. Saving is easier than growing a proﬁt, save where ever you possibly can.
e. Avoid bad debt: this is the quickest way to sink a small business. Make your payment terms clear before you start a project or deliver a service or goods. Don’t deliver just because you get an order-check out your customer’s credit history on a regular basis.
f. Collect Debt: If an invoice is overdue follow-up immediately.
g. Manage Receivables: cash flow can be managed by managing receivables. The sooner the money comes in the better for the cash flow.
h. Manage Payables: watch expenses carefully. Take full advantage of creditor payment terms. If a payment is due in 30 days, don't pay it in 15 days.
i. Sell invoices at a discount: Companies facing a cash-flow challenge and long payment terms of their customers often sell their invoices to specialized companies called factors. The discounter or factor advances most of the invoice amount — usually 70% to 90% — after checking out the invoice and the credit-worthiness of the invoiced customer. When the invoice is paid, the factor remits the balance, minus the discount fee. Companies that use invoice discounting get money quickly rather than waiting the usual 30 or 60 days for payment. After sending an invoice to an invoice discounting firm, a business can have money in its hands within 24 to 48 hours.
Cash flow is important to understand when evaluating a company's overall financial health. It removes all of the accounting adjustments that appear on an income statement such as deferred income taxes and depreciation, and delivers a clearer picture of the inflows and outflows of money and the earning power and operating success. It's also useful when working out what the impact of a new investment or project can have on a SMME's finances.
Managing cash flow can make or break a business. No cash on hand means you cannot pay creditors or your bank on time. This can severely impact on you reputation as well as ability to raise future finance. If you are unable to pay your staff there could be industrial action which can sink your company.
If you cannot pay your creditors or not being able to buy raw materials can severely impact your profitability and sustainability of your company.
It is important to note that cash flow problems in most cases are caused due to the disconnect between the outflow and inflow of cash. If a debtor is paying a few days late the impact on your cash flow can be severe.
SSN 2039-2117 (online) ISSN 2039-9340 (print)
Mediterranean Journal of Social Sciences MCSER Publishing, Rome-Italy
Vol 5 No 20 September 2014922
The Causes of the Failure of New Small and Medium Enterprises in South Africa
Department of Business Management, Turfloop campus, University of
Limpopo, Limpopo Province, South Africa
Turton and Herrington (2013) point out that the creation rate of new SMEs in South Africa as measured by the Total Early-Stage Entrepreneurial (TEA) activity is one of the lowest in the world. South Africa’s TEA rate decreased from 9.1% in 2011 to 7.3% in 2012. It is significantly below the average of efficiency-driven countries (14.3%). In addition, it is estimated that the failure rate of SMEs in South Africa is between 70% and 80% (Adeniran and Johnston, 2011).
According to Adcorp (2012), around 440,000 small businesses have closed in the last five years in South Africa. In addition, the number of new business start-ups is at an all-time low. The number of small businesses in South Africa has stagnated over the past decade. Small businesses offer the only real prospect of large-scale job creation in South Africa.
This is an adverse feature of South Africa’s entrepreneurial sector. South Africa’s high failure rate of new SME creation rate paints a bleak picture of the SME sector’s potential to contribute meaningfully to job creation, economic growth and poverty reduction.
Harvard Business Review describes the stages as follows:
Stage I: Existence
In this stage the main problems of the business are obtaining customers and delivering the product or service contracted for.
Stage II: Survival
In reaching this stage, the business has demonstrated that it is a workable business entity. It has enough customers and satisfies them sufficiently with its products or services to keep them. The key problem thus shifts from mere existence to the relationship between revenues and expenses. The main issues are as follows:
i. In the short run, can we generate enough cash to break even and to cover the repair or replacement of our capital assets as they wear out?
ii.Can we, at a minimum, generate enough cash flow to stay in business and to finance growth to a size that is sufficiently large, given our industry and market niche, to earn an economic return on our assets and labor?
Stage III: Success
The decision facing owners at this stage is whether to exploit the company’s accomplishments and expand or keep the company stable and profitable, providing a base for alternative owner activities
Stage IV: Take-off
In this stage the key problems are how to grow rapidly and how to finance that growth. The most important questions, then, are in the following areas:
Stage V: Resource Maturity
The greatest concerns of a company entering this stage are, first, to consolidate and control the financial gains brought on by rapid growth and, second, to retain the advantages of small size, including flexibility of response and the entrepreneurial spirit. The corporation must expand the management force fast enough to eliminate the inefficiencies that growth can produce and professionalize the company by use of such tools as budgets, strategic planning, management by objectives, and standard cost systems—and do this without stifling its entrepreneurial qualities.
Factors that limit entrepreneurial activity in South Africa
a. The education system does not encourage entrepreneurship as a career – it is seen as something you do when you cannot find a job or do not have a profession.
b. There is a lack of resources available to start one’s own business - banks want too much security.
c. Regulations create huge administrative burdens and high costs when starting a business.
d. South Africa is not highly entrepreneurial due to factors such as sanctions in the past and the education system that does not encourage entrepreneurship.
e. The environment in which children grow up influences them to believe that it is better to find a job and be safe.
f. Starting a business is a risky process that often involves cycles of failure. South Africa has a harsh attitude towards failure, which inhibits many potential entrepreneurs.
g. Infrastructure and the necessary skills required for the development of entrepreneurship are lacking.
h. A paradigm of entrepreneurship does not exist. The expectation is that big business, government and others should create jobs, rather than that one can create one’s own employment.
i. Competencies such as management and entrepreneurial skills are lacking amongst entrepreneurs.