Minds are like parachutes; they work best when open. [T. Dewar]
These are tough times for business. The economic depression and the associated problems of low demand and lack of liquidity are all causing nightmares to business executives.
Economists are predicting that Zimbabwe’s economic revival shall remain gloomy with developments indicating a tough time ahead.
True entrepreneurs are not the ones to put their heads on their knees and start weeping when facing tough challenges. Instead they put their minds to work and find strategies to not only survive but thrive amidst the gloom.
The illiquid environment needs a different kind of doing business.
Here are some strategies that business owners must adopt to cope with the current challenging environment.
Carefully manage cash flow
Cash is a business’ most important asset in this environment. Poor cash flow management will certainly bring down even the most profitable business. You need to pay special attention to cash flows.
Zimplow, for example, decided to change its credit policy to customers to minimize payment defaults. Although this resulted in a reduction in sales revenue, the company remains in a positive cash flow position.
Cash flow forecasting is a useful exercise in managing cash flow. All cash outflows and inflows of the business must be identified. Start by defining all your cash expenses for the near future, noting when they are due.
You then need to forecast your expected cash inflows. This needs more care as not all your receivables will come on time, if they come at all.
Separate those receivables that are very likely to be collectable, such as those owed by reliable and properly managed companies, from those of not so reliable firms.
A well defined credit policy is the starting point. It needs to be written and signed by your credit customers and clearly understood and adhered to by your sales people. Have the right routines and controls in place. The sooner a default payment is identified, the more likely it can be mitigated.
For some businesses, it might be wise to avoid giving credit altogether. Or you may offer discounts for cash or early settlement.
You will also need to strengthen your purchasing policy. Approval process for expenditures should be in place and followed strictly in line with the cash balances available or safely expected.
Consolidating suppliers will allow your company to place larger orders and increase negotiating power around price and payment terms. Supplier payments should be made on the last day they are due, except if it makes sense to take advantage of early payment discounts.
Careful inventory management is essential as it affects a business’ working capital. Just in time inventory can be a preferred method where one cannot afford to have cash tied up for extended periods of time. Knowing your metrics like inventory turnover, inventory levels or stock to sales ratios will help you make the right decisions.
Obviously you will lose some customers when you implement these stringent cash flow management tactics. However, it is better to have lower revenues than to be stuck with bad debts.
To compensate for reduced sales, you will need to craft strategies to get new high quality customers. This will be the subject of my next article. If you haven’t read the April issue of BusinessLink magazine, please visit my website and download a sample, http://smebusinesslink.com/magazine.
Phillip Chichoni is a business development consultant, trainer and publisher of BusinessLink Magazine. You can contact him for all your business plans, company and PBC registration, marketing advice, tax consultancy and accounting, his email is email@example.com or visit http://smebusinesslink.com.
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