Is your business financially healthy?Here is how to avoid cashflow crisis

It’s the 5^th day of the month. You wake up excited to start the day. As usual the first thing you do is check your to-do- list for the day.  Top on the list is confirmation with the bank that all standing orders in your transactional account have been honored. Second, it’s the confirmation that the petty cash account is funded and finally, is a confirmation that the business has enough money to service all client jobs that arise throughout the month. In 15 minutes, you have just confirmed the financial health of your business and are ready to spend the rest of the month working on your business.

The scenario above is the classic Entrepreneurs’ dream. Depending on the financial health of your business, it’s beyond a dream; it’s a prayer item scenario (speaking of prayers I hear being an Entrepreneur is the surest way to build a strong relationship with God. Nobody says more prayers than an Entrepreneur!).  Most Entrepreneurs can only dream of making rent and salaries on time, especially without borrowing. Some businesses live from hand to mouth which explains the desperate calls Entrepreneurs make to their clients after delivering service.  That is the reality of Entrepreneurship. However, as each Entrepreneur knows, no situation is permanent. It can only get worse or better. The choice is yours. Before this article takes a whiny tone, let me jump straight into the gist of it. This is an article in response to a comment by one of our ardent readers. Who after reading the article on https://myniusline.com/how-to-avoid-trading-your-dignity-for-a-bank-loan/ requested for some insights on how to build a firm financial foundation for a business so that they don’t ever have to become a beggar.

Honestly speaking, there exists no scientific formula for building a firm financial foundation. Largely due to the fluid nature of the economy and erratic human behavior this greatly affects consistency and patience the key ingredients to building a firm financial foundation. That said, it’s not all gloom. With minimal behavior modification and a better understanding of the economic trends any Entrepreneur who is focused on building a lasting enterprise can manage to secure the business financially.

• Be honest about the current financial health of your business

Most Entrepreneurs are either ignorant or in denial of the true financial health of their business. They are confident that the business is not making losses; at least based on the quotations they have been issuing. According to these Entrepreneurs, every project the business undertakes is undoubtedly profitable. How can that not be possible? How do you explain the businesses’ ability to meet all its financial obligations? Of course there are certain months when the business may not be liquid enough to field all its costs, but that is why you go for credit, to cover for those short falls. Besides, the business recovers from such situations as soon as the next invoice is paid.

True. Your business is able to meet its obligations fairly easy, but how much does the business really owe? Most businesses owe money from a numerous sources concurrently: friends, family, mobile loans, SACCOs, but the Entrepreneur will most likely be concerned with the loan that is secured by an asset. So in their estimation their financial health is good.

The formula of your financial health is simple calculate your total debt: Debts + immediate expenses eg monthly budget = Total debt. Then calculate your income: Money in the bank +pending invoices = Total income. Finally, calculate Total income – Total debt =Financial health of your business.  The ultimate measure of your financial health is: suppose the business had to meet all its obligations at ago, would the current income be sufficient?  The answer to this question is the true financial health of your business. This is not an easy exercise for any Entrepreneur given all the years, effort, emotions and finances you have put into the business. It’s important to be mentally prepared before undertaking this review. It’s a fairly simple activity, but if you are not confident to undertake it consider hiring experts such as http://fhc-ea.com/ who will not only help you assess your situation but will advise you on how to get out of the credit cycle or how to scale up your business if it’s already thriving.  This is the first and most important step towards building a financially healthy business.

• Paying off your debts

If anyone heard me say that “nobody prides themselves in being heavily indebted”, they would say I have not met the Government of Kenya. It seems like the indebtedness of our economy is a source of pride especially the infrastructural projects that Government flaunts and just so you know has a grand master plan for repayment which includes the taxes from your business. But I digress.  In all honesty, we wish that all debt was easily payable. That the business would take debt, use the funds to grow exponentially and then refund the lender their principal +interest and remain with the larger chunk to continue expanding.  

Once you undertake the financial health check, it may shock you beyond measure. But do not fret. You are now closer to making your business financially stable. Once you are over the shock of your financial status, act immediately. If the business is in debt, no matter how negligible, identify areas within your budget where you can make cost savings without hurting business operations. The most common areas of the operational budget that can quickly be adjusted include entertainment allowances, telecommunication, courier fees, office snacks and teas, team building events, transport costs, renovations and repairs, and some consultancy fees. It’s important to make sure that your adjustments do not affect quality of delivery and staff. The cost savings derived from your budget should go directly to paying off your debts. Develop a payment plan and criteria for debt repayment. Start with debts that are likely to injure the business, followed by smaller debts and then finish with the largest debts that don’t pose serious threat to the business.  In a few months, you shall begin to enjoy the peace of mind and respect that comes with a thriving stable business. Meanwhile, your business shall be on its way to financial stability.

• Invest for the business

Every business needs sound investments that support its current and future operations. As an Entrepreneur you have a clear vision your ultimate business.  Start building that enterprise now. As you repay your debts and meet monthly obligations, put aside some resources that go towards investing for the business. The investment pot must be filled regardless of the financial health of the business, start small and grow. Where possible start paying for these investments. Some of the most common investment instruments include company shares for listed companies, government bonds, real estate, copyrights and intellectual property among other things. Identify a credible investment consultant who is well versed with current market trends but, Do not just rely on the consultant, educate and expose yourself to economic trends worldwide. Read, watch, and listen to business news, it’s the surest way to expand your world view and get to know where opportunities lie. But most importantly, follow your gut. There is a reason your business is still operational and yet you have never engaged the fancy investment consultant and your business shall be on its way to stable financial health.

• Develop a strategic plan

If you fail to plan, you plan to fail. This is very true in business. The Entrepreneur needs to have a clear growth plan for the business. The plan plays a crucial role in anticipating business needs which allows ample time for mitigation where necessary.  For instance, the strategy will enable the Entrepreneur anticipate a cash flow crisis; hence provide adequate time to source for affordable credit. Another important role of a strategic plan is guiding customer retention and acquisition. Customers relations is the heart of the business, therefore it cannot be handled haphazardly.  A strategic plan clearly defines business Human Resource (HR) needs making sure that the business has the necessary HR to meet customer demands.  A strategic plan needs not to be complicated, it should be easy to implement and evaluate. In experience I have found that it’s better to have shorter plans 3-6 months at the beginning. Then make them complex and longer as you grow your business. Short term strategies are a great motivation because you are able to see results almost immediately. That is a sure way to boost your adrenaline to achieve much more.

• Be patient and consistent

The biggest corporation you know today was built over a long period of time. Achieving financial stability and sustainability is a process. Throughout the process you shall make mistakes, fail and rise again over and over again. You need to be patient and consistent in the implementation of the strategy. Remember to celebrate small wins and quickly get up when you fall. Most importantly, learn from your mistakes and build on them.  Protect your business and its dignity and learn  https://myniusline.com/how-to-avoid-trading-your-dignity-for-a-bank-loan/

Finally, make it a habit to learn from other Entrepreneurs world over. Listen to podcasts, attend master classes on Entrepreneurship. Never ignore an entrepreneurship story. You will be amazed at what you can learn by simply keeping an open mind. At the end of the day, the financial stability of your business boils down to the ability to increase your income.  Get creative and provide innovative solutions that solve your clients’ problems. That is the surest way to keep income flowing. Whatever happens do not give up, have fun, and enjoy your business because you are going to be building it for a long time! All the best as you build a financially secure business.