The cash flow conundrum

“There is more than sufficient funding for business in South Africa,” says Richard Mackenzie, sales director of Transaction Capital Business Solutions. “It is how Small Medium and Micro Enterprises (SMMEs) present themselves that creates a problem with gaining access to funding.”

 Given that the National Development Plan (NDP) forecasts that 90% of new jobs will come from the SMME sector by 2030, SMMEs need all the support they can get.

 The South African Institute of Chartered Accountants (SAICA) 2016 SMMEs survey found that the longer a SMME is in business, the bigger it will be and the more people it will employ.  This is an important point considering that the NDP is relying on SMMEs to reduce unemployment to a mere 6% by 2030.  There’s a lot of work to be done if we are to achieve this goal.                          

 Cash flow and business know-how

 “One of the key findings of the 2016 SMME Insight Report is that SMMEs fail largely because of cash flow related problems and the inability to manage administrative and business processes,” says Jeanne Viljoen, project director: small medium practice at SAICA.

There is more than sufficient funding for business in South Africa

But a strange anomaly exists in South Africa. Many entrepreneurs don’t know where to access funding, outside of traditional banks. 

 Sadly, many SMMEs close their doors due to a cash flow crisis which could have been averted. Compounding this shortcoming, many lack the business skills to come up with alternative solutions to resolve the problem of insufficient funds.

 Speaking at a recent ‘SMME Challenges Unpacked’ seminar hosted by SAICA, Richard Mackenzie said that SMMEs currently contribute 34% towards the country’s gross domestic product. He advocates that the private sector and government should do more to support SMMEs.

 “This would include nurturing SMMEs through the critical first two years and providing access to finance, cash flow management and mentorship,” says Mackenzie. “And most importantly, pay your SMME suppliers on time.” His comments are borne out by the 2016 SAICA SMME Insights report’s finding that the first three years of a business are the most critical.  

 Mackenzie is observing a worrying trend among SMMEs.

 Many SMMEs don’t follow proper risk assessment processes when on-boarding new clients, especially when starting out. Most often their first clients are businesses and or individuals that they are familiar with. This often becomes a problem, especially when it comes to collecting outstanding and overdue debts. Imagine how difficult it must be to try and ask for a large sum of money whilst in a social environment.

 He points out another common shortcoming, “Small business needs to be educated on the importance of proper financial controls and accurate reporting. Failure to accurately track income and expenses can lead to zero profits or potential insolvency. Also not paying creditors on time can result in a deteriorating risk score at the credit bureaus; this will ultimately impact negatively on borrowing opportunities and radically increase the cost of funding.”    

 Transaction Capital Business Solutions provides approved SMMEs with access to diverse types of assistance: ranging from cash flow and working capital solutions, credit risk data, trade credit insurance and outsourced accounting services.

 “Our core business is debtor finance and property-backed loans,” says Mackenzie.  “It’s a well-known fact that SMMEs often have a problem securing finance for expansion or find themselves in a sticky situation because a debtor hasn’t paid them on time. But they could put themselves in a stronger financial position if they improved their business management skills. They don’t always understand end-to-end business best practice.”

 Mackenzie proposes that SMMEs have structured business processes in every area of their operation. This should include, among others; marketing, orders, credit applications, risk assessment, collections, on time cash in the bank, on time creditor payments, operating costs and expense control.

 The ultimate benefit when implementing sound financial controls, improved business processes and accurate reporting; is creating a sustainable business that grows in value.