About Me

I am A Chartered Certified Accountant who does a bit of gardening.
The Pictures of the flowering and non-flowering plants, fruits, vegetables, culinary & aromatic herbs
in this blog are of my garden.
Most of my garden collections are driven by the Fs: They either Flower, have a Fragrance, provide Flavor, bring Fruit, Food or are air Freshening.

Tuesday, 14 June 2016

The broke but profitable business ‪

Is it possible to run a broke but a profitable business?

Here is a scenario: A retail business buys stock of Ugx400, 000 and sells it on credit for Ugx600, 000. Although this transaction has made a Ugx200,000 profit, unless the credit is paid, the business will have a negative net cash flow of Ugx400,000.
If this kind of a scenario goes on for a while, the business will not be able to meet its obligations as they fall due and the small business may go out of business.

This calls for diligent management and analysis the business cash flows. Careful cash flow management allows a business to estimate the amount of cash that it will have on hand at any one time, project trends in cash inflow and cash outflow, and evaluate whether a shortfall or surplus in cash could potentially occur.
Cash is to a business as fuel is to a car. You have to regularly monitor your fuel gauge. Try ignoring your fuel gauge and see how far or for how long you will be able to drive. Practically speaking, one doesn’t literally open the fuel tank to check the fuel levels. Similarly there are tools one can have in place in a business to help monitor the cash flows.

Many accounting softwares such as QuickBooks are very user friendly and have inbuilt financial dashboards that allows you to monitor your business performance and position very much the same way you monitor your car dashboard.

Genuine QuickBooks Accounting software licenses are available at the The Accountancy and Business Clinic where Set up, Installation and training is also done.

15 Tips for small businesses dealing with cash flow problems
From a blog by Direct Capital on ‘How to Solve Cash Flow Problems’, some experts gave the following tips:
1) Address the causes of sluggish cash flow, not just the symptoms. Cash flow is like oxygen for your business, without it the business will die. A profitable business can still easily run out of cash. Far too many entrepreneurs spend time and energy focused on business symptoms rather than the causes of the symptoms. Often the underlying cause of a cash flow issue is an underdeveloped accounting and finance infrastructure. By embracing many of the same fundamentals of lean manufacturing, the speed, accuracy, and efficiency of an accounting and finance infrastructure can radically improve - Jared Siegel

2) Get to the root of the cause. Step back and take a holistic look at your company’s finances and operations to determine what changes must be made to address the issue. Review how you are managing your flows of goods, funds, and information. Look at your supply chain and shore up any weak or ineffectual areas. Consider working capital financing to deal with seasonal fluctuations, help manage cash flow, and facilitate growth - Krista Morgan

3) Develop well defined targets of working capital reserves as a percentage of overheads or sales, and to always ensure that your target is considered before making significant purchases. For small businesses, prevention management is a much easier problem to solve than attempting to rectify a cash flow issue when you’re faced with it. A numerical foundation to cash flow protection is fundamental to the survival and growth of your small business - Nigel Davies

4) Be PREPARED to ask for financial support. If your business has a solid reason for why it needs to exist then temporary cash flow from operations problems can be helped by asking for financial support. For a small business I’d approach friends and family for cash that would be either equity in the business or a line of credit – a working capital facility - Liz Lemesevski

5) The best way to deal with cash flow problems is…To avoid them altogether. By taking just a few minutes each day to maintain a cash forecast, small business owners can anticipate the possibility of future cash shortages and usually take steps to avoid them. This is common sense yet our research shows that many small businesses don’t maintain a formal cash forecast, opting instead to rely on a mental checklist of cash “ins” and “outs”. This informal method comes with endless worrying about the accuracy of one’s intuition, and inevitably leads to a surprise cash crisis - James Good

6) Invoice your clients on time. The day you complete the project or ship the goods, you should send the invoice out. Do not wait a day, week, or year to do it. If you don’t think getting paid is a priority why would your clients think any differently? If you’re running a real business and not just an expensive hobby, you need to be professional about getting paid - Dawn Fotopulos

7) To paraphrase the old cliché, an ounce of liquidity is worth a pound of cure once a business becomes distressed. As such, in order to address cash flow problems from the start companies should strive to…Maintain a cash cushion. Possessing extra ammunition can also serve as a secret weapon that enables forward planning businesses to go on offense when competitors are running for cover - Gregg Schoenberg

8) As a small business owner myself and a consultant to small business on accounting, tax, and payroll issues, the number one advice I offer to small business owners who are looking to enhance their profitability and cash flow is…To understand the monthly charges/hidden costs of running their business. There are a lot of hidden fees with the merchant services provider and this area of financial services is not regulated yet so there are some unscrupulous providers who tack on charges/fees that the owner may not even be aware of or overwhelmed by what appears on their merchant statement. Even if you have a lease for equipment you may still be able to negotiate with a new provider to get yourself better rates - Kathleen Fitzpatrick

We are undeniably in the cashless era and our businesses must evolve or be left behind. Not many people still walk around with bundles of cash in their purses, wallets and socks (I have seen…). Business should embrace online payments options offered by the banks, Mobile Money, MPESA, Airtel Money, PayWay whichever is the best option for your business - Lilian Katiso

9) Three words: accept credit cards. For businesses that deal with individual consumers, this is a no-brainer. For businesses that deal with other businesses, however, it’s fairly uncommon. So why don’t more small businesses in the B2B space accept credit card payments from their customers? I think it’s because of the per-transaction processing fees.
You will be happy because your customers will pay you faster. Much faster. When I send invoices to my customers who pay me by check, I’m blown away if I receive payment in less than 15 days. Want to know how long, on average, my customers who pay by credit card pay me? 2 days. To me, the benefits of a healthy cash flow far outweigh the cost of credit card processing fees - Ryan Cormier

10) Ensure your business is using the very latest payment technology. Globally, we’re increasingly becoming a cashless society and it’s imperative that businesses free themselves from the antiquated payment systems that are currently holding them back. Around one in four SMEs that don’t use the latest technology admitted that this has resulted in lost sales opportunities.
Earlier this year, First Capital Cashflow reported that SMEs are now being forced to wait more than two months on average before they receive payment from other companies. Research by the Asset Based Finance Association found that small firms had to wait 23 days longer than larger organizations, which obviously has a negative impact on cash flow. With this in mind, it’s even more important that businesses are using modern solutions that enable them to receive payments instantaneously, as too many long delays can result in serious financial difficulties - Louisa Buckingham

If you have supplied some of the major supermarkets in Uganda, they take as much as 90 days or even more to pay! Meanwhile where you purchase your supplies and/or raw materials to make or produce the supplies to the supermarket, they demand payment in cash or sometimes upfront. These scenarios leave many a business cash-strapped. The business has to put in place a mechanism to ensure that the pipe that flows in money is wider than the pipe that flows out - Lilian Katiso

11) Identify the problem and cut it’s head off. At my company, the biggest problem we had was attempting to fix our cash flow without plugging the leak. For us the fix this meant taking much larger sums in advance from clients and billing regularly and aggressively. Now our outlays weren’t so high and cash flow was much improved.
It’s unfortunate but cash flow rarely has a single solution. For example, in our case it meant educating our clients and in some cases finding better clients. The jump from “cash flow problem” to “need better clients” isn’t obvious. That is why it took us time to identify the problem because it wasn’t, under all the muck, a cash flow problem. It was a client targeting problem. Which leads to an extra tip I have: plan far ahead. Have weekly, monthly, yearly, and 5-year financial goals. Then when cash flow problems first start it’s plain because you are missing your targets. - Christopher Mark

12) Find creative ways to reduce your expenses and to pay your expenses. An example would be to identify your top 20 vendors that you spent money with last year. Give the vendors a call and let them know how much money you spent with them and tell them that you need to reduce your expenses. Ask for lower rates, if they are not willing look for alternative vendors who will give you a lower price for the business.
On the payment side, you can ask for extended terms or a line of credit with your vendors. You can also identify areas where you may be overspending. Do you purchase more inventory or items than you need? If so, look at prior history and create a forecast with a small cushion to reduce your spending. - Chandra Winford

Did you know that one of your sources of finance is your suppliers? Your supplies are your biggest allies especially when you are cash-strapped. For instance if you are a retailer and you are running low on stock and have no money to replenish, a supplier can give you stock on credit and you pay back later.
One day my Mum went to buy stock for her boutique. After selecting all she thought she needed, she realised that she was a little short on cash. The supplier told her "Don't you worry, since you are my good client you can pay me next week". True to her integrity, Mum kept her pledge. The next thing she knew, the supplier calls her when new stock came and offered to deliver them to her on credit!
Yes the supplier can finance your stock or inventory. But it takes time and being faithful to build that kind of trust. They can give you little credit for a short period. When you prove your integrity your supplier can increase the amount of credit and even the number of days. What kind of relationship do you have with your suppliers? Lilian Katiso

13) Communication.….Most vendors and finance companies understand that financing a small business is a partnership. The worst thing you can do when struggling to pay a bill is stop communicating. If you are open and honest with a vendor and work diligently to get them paid, they will typically be very accommodating. In addition, once the issue has passed you will likely have a loyal vendor that is happy to continue the business relationship, because they know you have integrity - Josh Nickell

Imagine drinking from an empty bottle? Is it even possible? But we make it possible when it comes to matters money….we spend from empty pockets and draw from empty accounts - Lilian Katiso

14) Go on a cash-only spending challenge. I did this recently with my own small business and it was a great experiment! I learned a lot about where money was being spent, which transactions were a waste of money, and ended the month with a small surplus of revenue.
There really is no downside to the challenge and since it’s just an experiment a business owner doesn’t have to continue doing it long-term –unless they want to of course! A cash-only spending challenge makes it easy to prioritize spending habits, run a business more efficiently and ensure funds that are approved for expenses are being spent in the best ways possible. Then if the owner needs to take out a business loan, for inventory or other operating needs, they won’t waste any of the funds, and will have a fresh idea of the company’s financial standing - Carries Smith

The national budget was read last week, how does it impact on your business? Some of the Uganda national budget highlights are:
• Tax payers who merge or acquire or acquire loss making entities to operate this same business will be allowed tax relief for such losses
• Increase on excise duty of Ugx 100 per litre of diesel and petrol
• Excise duty of 20% on sweets and confectioneries
• Increase in cement costs by Ugx1,000 per every 500kgs
• Increased stamp duty on transfer of property from 1% to 1.5% percent
• Increased registration fees for personalised number plates from 5M to 20M
The more important question is whether you do have a budget for your business in place. This will allow you to make adjustments to your business operations or cost structure and inform you of the need to make adjustments to your prices. Lilian Katiso

15) …Most financial problems business owners encounter are because they have not taken the time to accurately track their income or expenses. So my number one tip for small businesses dealing with cash flow issues is…To use a budget planner that highlights common categories of expenses and makes allowances for savings. Planned savings will help smooth out the affect of natural market fluctuations on the business and one’s personal life.
Knowing how much money you make, how much money you keep, how much money you need in order to meet your obligations and when you need that money, allows agents and investors to say “no” to unreasonable risks and “yes” to real opportunity. Liz Recchia

To your success!

Compiled by Lilian Katiso

Image credit LinkedIn.Com