Keep cash cache full and debt trap empty with these strategies
We all know just how important capital and working capital are to a business. The failure of even big listed entities due to liquidity shortages tells us a lot about the importance of having adequate reserves of capital.
Business owners understand that cash is king, and work hard to ensure that they have cash on hand for unforeseen circumstances. When businesses fail, it’s because they have failed to keep an eye on cash flow.
Debt can also sink a business. Some try to prevent this by cutting costs, but this doesn’t always work.
To avoid falling into the debt trap, there are a few things businesses can do.
Manage invoicing systems
correctly: You must ensure that you invoice your clients on time. Delaying this affects your cash flow and makes you more prone to relying on debt to cover up shortfalls until clients pay you.
Don’t bring problems upon yourself by not issuing invoices or following up on outstanding payments. Collect money owed to you timeously as sometimes clients won’t pay you on time and it’s up to you to follow up.
If you allow clients to buy on credit or pay for services at a later date, you should have a system in place to track invoices, payments and client behaviour.
Avoid clients who make late payments or who you always have to chase to pay up.
If they’re not worth the effort, rather refer them elsewhere and keep the integrity of your invoice cycle intact. Consolidate or refinance your debt: Depending on how big your debt problem is, you could consider one of these options.
Consolidating debt frees up cash because you only pay one creditor as opposed to shipping off many different amounts to different creditors at variable interest rates.
Refinancing is similar to consolidating your loan except you usually replace your existing loans with a better loan.
The new loan can either be at a better interest rate or more favourable monthly payment terms. You should also move to refinance or consolidate your loans as soon as possible.
Don’t wait until your debt is unmanageable. You don’t want to consider consolidation or refinancing when your credit score has been adversely affected because this has a direct impact on the amount of interest you’ll be charged.
Plan ahead: South Africa is currently in a very low interest rate cycle. While this looks
like it’ll be the norm for the foreseeable future, there’s no predicting when this will turn.
The Reserve Bank can’t keep cutting rates, so at some point the cycle will turn up again. It may be worth considering a fixed interest loan but you need to check if the rate will be favourable.
Ensure your debt suits your needs: Far too often businesses don’t match up the type of debt they take out with their business needs.
Avoid taking a five-year loan to cover short-term shortfalls, and don’t rely on your overdraft facility for long-term obligations. Understand the credit facilities available to you and how to use them optimally.
You should also shop around when it comes to credit – don’t just settle for the first offer that lands in your lap.
It is also important to remember not to be fooled by big numbers. Just because you can get a R10-million loan doesn’t mean you should take it.
Your debt should be adequate for your business needs. Taking on more debt than is necessary usually results in unnecessary spending and you incur extra costs with needless interest payments.
If all else fails, try to get a capital injection by raising funds through an investor.
It’s not ideal, but it may be more attractive than carrying a heavy debt burden.