How SMEs in Africa Can Attain Positive Cash Flow in the First Year
Every business owner seeks to attain a positive cash flow, especially in their first year. Running a successful business requires passion, determination, and focus. As a business owner, you have to pay close attention to the important aspects of your business for it to grow. One of the areas all African SME owners should pay attention to is their cash flow.
A lot of business owners tend to confuse cash flow with profit and petty cash. While all three aspects are crucial to business growth, knowing their differences will help you identify the aspect that requires immediate attention.
Since this post is about keeping cash flow positive in the first year of your business, we will keep our focus solely on the subject matter.
What is a Positive Cash Flow?
To effectively understanding the difference between positive and negative cash flow, we need to first understand the concept of cash flow in a business.
The term “Cash Flow” has to do with the inflow and outflow of money in your business. Cash flow is positive when you have more cash flowing in than flowing out. A negative cash flow would then imply that more money is going out of your business than coming in.
Cash flow is as crucial to the success of any SME as profit. It is a vital aspect of any business that significantly influences the performance of such business. You should know that it is possible to record impressive overall profit while experiencing negative cash flow. In this scenario, negative cash flow is often a result of ordering too much stock or spending unreasonably.
Fast-growing Africa SMEs often demand more money to hire the right people, purchase stock, etc. Hence, the reason why many small business owners believe that keeping cash flow positive in the first year of their business is an impossible feat. However, this is not necessarily true.
What if we told you that your business can experience positive cash flow right from its first year? Would you believe it? Read on to find out how.
How to Attain Positive Cash Flow in the First Year of Your Business
Ensuring that your cash flow is positive in the first year of any business of often believed by many small business owners to be impossible. This belief is understandable when you consider that new businesses largely depend on the money they make from selling a product or service to keep functioning. They have to think about labor costs, fuel, and some unexpected expenses. To make this worst, most small businesses tend to experience late payments a lot. All these make keeping up with operational demands almost impossible.
According to Forbes, about 20% of SMEs around the world shut down in their first year and about 50% of them fail by the fifth year. These statistics indicated that about 70% of SMEs struggle with keeping their cash flow positive.
With these stats, you would almost conclude that keeping positive cash flow in the first year as a small business owner is not possible. However, the grey area of the same statistics indicates that about 80% of SMEs get attain positive cash flow from the first year and 30% continue to do so in their fifth year.
There is only one way to attain positive cash flow in your business, monitoring your cash flow.
Monitoring Your Cash Flow is the Only Way
Elaine Pofeldt, a Forbes Contributor and SME expert identified lack of proper planning as the major cause of negative cash flow in any business. She stated that ”the only way to prevent cash-flow crunches in advance is by proper planning”. Hence, the only way African SMEs can attain positive cash flow from their first year of operation is by monitoring it closely and continuously. It has to become part of their business culture.
Africa SME owners can simplify this process by taking advantage of Cloud-based SaaS (Software as a Service) tools like Xero and QuickBooks. These tools help small businesses pay attention to their finances and properly keep their books. They are properly designed to help business owners monitor the inflow and outflow of cash in their businesses. This way, they can regulate their spending to ensure that they keep their cash flow positive.
Africa SMEs can take advantage of these tools to generate cash flow statements, hence, producing accurate cash flow forecasts.
Importance of Keeping Cash Flow Positive
Here are some of the benefits African SMEs can enjoy by keeping positive cash flow:
· Making Better Decisions and Plans:
An accurate cash flow forecast or statement helps business owners know the actual amount of funds they have per time. This information will help guide their decision-making processes and plans. Business owners can use this statement to determine the financial strength of their businesses. Hence, helping them know if making some expenses is a proper financial decision or not.
· Identifying where and How Money is Being Spent:
African SMEs that monitor their cash flow tend to better understand where and how they are spending their funds than businesses that don’t. Running a thriving business requires that you always know where your funds are going and why.
In some cases, it is quite difficult to see your expenditures in black or white. Monitoring your cash flow consistently helps you identify the areas of your business that can do with a little cost-trimming.
· Expanding your Business at the Right Time:
Every business owner has a drive and passion to expand their businesses. This involves hiring more staff, new markets, etc. However, expanding your business at the wrong time can be a problem in the long run.
Business growth often requires cash. This means that you will have to spend more. Hence, implying that the volume of outflowing cash will increase. If the inflow of cash is not sufficient to keep your business running, expanding may be a bad idea at that time.
Running a successful business hinge majorly on keeping cash flow positive at all times. The only way African SMEs can achieve this in the first year is by monitoring their cash flow. You can take advantage of SaaS financial tools to simplify this process.