Cash is king

Stephene Chikozho

Big Business Ideas

IN markets characterised by uncertainty and rapid change, the mantra “cash flow is king” has never been more relevant for businesses.

As companies navigate through fluctuating markets, supply chain disruptions and evolving consumer behaviours, maintaining a healthy cash flow has emerged as a critical determinant of business sustainability and growth.

Cash flow, the net amount of cash being transferred in and out of a business, is the lifeblood that sustains operations, fuels expansions and safeguards against unforeseen challenges.

Unlike profit, which is a theoretical figure reflecting the difference between revenue and expenses, cash flow is tangible and immediate, representing the actual funds available for use.

In times of economic stability, credit is cheap and readily available, and companies focus on profits.

Companies with weak cash flow operate by using supplier credit and overdrafts.

But, in times of recession, relying on credit is dangerous.

Cash flow is king.

The importance of cash flow management

For new businesses, fast-growing companies, and in times of recession, cash flow is critical.

In other words, profit takes a back seat, while cash flow becomes the critical factor.

As noted earlier, profit is an abstract concept based on matching costs to the revenues generated within a certain period of trading.

This sounds fine but in practice it can lead to a huge cash shortfall.

For example, if a construction business links its costs to the time when the finished houses are ready for purchase, it has ignored the huge cash outflows that are incurred during the building process and might run out of cash before the houses are sold.

When times are good, a company may rely on dipping into an overdraft to make up for a cash shortfall.

But when times are tough, a reliance on the bank may be too risky.

A business needs to manage its finances well enough to avoid periods of negative cash flow.

A positive cash flow ensures that a business can meet its obligations, such as paying employees, suppliers and creditors on time.

It also provides the flexibility to invest in new projects, research and development, and market expansion, without relying heavily on external financing.

How good companies fail

Cash is a constant pressure for every new business.

Even if the company keeps to its initial start-up budget, it takes time for trading to reach an adequate level to generate positive cash flows.

For example, a sports equipment store may take three years to build up the regular clientele that will enable it to start making money.

Until then, the business faces negative cash flow.

So, it is crucial for new businesses to prioritise cash flow from the beginning.

This may mean leasing equipment, or buying it second-hand rather than new, and choosing suppliers that provide the same credit period as the store gives to its customers, even if these suppliers cost a little more.

Maintaining a healthy cash flow is easier said than done.

Many businesses, especially small and medium-sized enterprises (SMEs), struggle with cash flow management due to irregular income streams, high operational costs and delayed receivables.

The current economic landscape, with its unpredictable shifts, only exacerbates these challenges.

To combat these issues, African businesses are adopting a variety of strategies.

These include improving invoicing and collections processes to accelerate receivables, negotiating better payment terms with suppliers and maintaining a cash reserve for emergencies.

Additionally, many are turning to cash flow forecasting tools and software to predict and plan for future financial scenarios.

The role of technology

Technology plays a pivotal role in modern cash flow management.

Digital tools and platforms enable businesses to have real-time insights into their financial health, automate billing and collections and efficiently manage inventory and expenses.

Looking forward

As the business landscape continues to evolve, the importance of cash flow management is set to grow.

The companies that thrive will be those that prioritise their cash flow, adapt to changes proactively and leverage technology to enhance their financial operations.

In the final analysis, while profitability is essential for long-term success, it is robust cash flow management that will enable businesses to survive and thrive in the short-term, making sound cash flow management a guiding principle for companies aiming to navigate the complexities of the African economic landscape.

*Stephene Chikozho is chief executive of Big Business Africa, a dynamic and influential network dedicated to fostering collaboration, innovation and success for businesses in Africa. He writes in his personal capacity. He can be contacted on WhatsApp: +263772409651, or email [email protected]