Your Business.

One of the major challenges facing small and medium-sized enterprises (SMEs) in South Africa, is cash flow due to increased debtors and bad debt.

The survey showed that to some extent, small businesses rely on banks to meet their cash flow requirements, with 15% of businesses having taken out a loan within the past 12 months and 8% looking at taking out a loan in the next 12 months. This therefore shows that one out of five SMEs will have taken out a loan in 2007 and 2008.

The cash flow challenge felt by SMEs is compounded by large debtors’ books. Amrei Botha at Standard Bank has the following tips for smarter cash management:

Take advantage of the tax concessions by SARS: If your business turns over under R1-million per annum and you have no other business interests, you may qualify. Check out

Manage your clients: If someone is about to become a significant client or you will sign a big contract with a company, first check out its payment track record and payment procedure to determine whether it pays its creditors on time. Make sure your clients are clear on when and how you expect to receive their payment. For example receiving payment via an electronic funds transfer is quicker and more secure than waiting for the cheque that is in the post.

Match debtor and creditor terms: It helps if a business can avoid overdraft or debtor finance by matching debtor and creditor terms. The ideal is to structure debtor and creditor terms in such a way that cash is collected from debtors before creditors are due to be paid.

Consider a deposit or down payment: Minimise the risk of non-payment by requesting a deposit from clients. Should the client default on the payment, you can cushion the effects with the initial payment while you collect the outstanding debt. A down payment can assist smaller businesses to cover critical initial expenses and deliver on a contract without having to rely on working capital finance.

Avoid trade credit for as long as possible: Relying on trade credit is often expensive and does not enhance the trade creditworthiness of the customer as payments are infrequent and a sustainable payment trend is never established.

Consider debtor finance – if it meet your needs: Debtor finance is another strategy that works to free up cash. This tailored product meets the needs of credit-cautious businesses who need access to cash, but who don’t want a traditional credit facility. This provides a debtor finance option that gives businesses access to funds against invoices that are yet to be paid. Admittedly, the take-up of debtor financing in South Africa relative to other countries is very slow, but this can be attributed to misperceptions about this financing option. Internationally the concept of debtor financing is mature, while locally, it is too often associated with businesses in financial dire-straits.