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Maybe it’s not just a loan you need, but a little love too.

There are 10 million people employed in small businesses in South Africa, but this figure has fallen by 14% in the immediate term. consequences Covid lockdowns.

With 11% fewer small and micro businesses by the third quarter of 2020, there are concerns that some of this damage may be permanent.

But some of that damage is self-inflicted, says Michael du Plooy, chief operating officer at an SME lender. Preference capital.

“There is no doubt that most small businesses have been subjected to a horrific economic contraction that was not of their making, but in the many cases we have examined, the situation has been exacerbated by poor management decisions. “says Du Plooy. “We’ve learned from experience that a small business doesn’t always need financing when it’s in trouble, but also a little love. Management needs a sounding board to ensure that the decisions they make are rational and will allow the company not only to survive, but also to thrive in the long term.

It is a point of satisfaction for Preference Capital that its clients have a higher than average survival rate. “We are a fairly cautious lender in our subsidiary, Cash Flow Capital, and we make no apologies for that. We want to make sure you have a business that can pay off its debt and is in a stronger position because of our intervention.

“There is no doubt that once you are accepted as a client of Cash Flow Capital, your prospects are good. We are not looking to build a loan portfolio to please shareholders. We want to make sure it’s profitable.

The firm brings an eclectic mix of skills to issues typically faced by small businesses, including former bankers, accountants, compliance specialists, risk and data analysts, and those, like Du Plooy, with a background in investment analysis.

“We had to develop our own methodology to analyze small businesses. We don’t look at companies in the same way as a bank, for example. We look far beyond the usual banking obsession with collateral. We’ll get into the inner workings of the business, including its culture, to see how we can help when needed.

“The question we always ask ourselves is, the people we’ve turned down loans, have we turned them down correctly, and the people we’ve approved, have you approved them for the right amount?”

We asked Du Plooy for his perspective on some common cash flow issues that small businesses face.

Why is cash flow management so important and what are some of the most common causes of cash shortages?

A common cause of cash shortages is the owner-manager making unilateral decisions without anyone challenging them. So he might end up over-ordering inventory assuming that’s the best way to increase sales. This, of course, assumes that the business has no sales because it has no inventory. They don’t realize that stocks are tied up money.

Accounts receivable management is abysmal in most businesses. Every business is a collection business, and if you neglect that, you’re going to be in trouble fast. We’re seeing a lot of neglect of accounts receivable, with 120-day accounts receivable piling up, and business owners don’t want to write that off because it then has to be expensed in the income statement. So, one of the worrying trends we are seeing is the accumulation of accounts payable, while overdue debtors are also increasing, which means less cash in the business. In our experience, expensive debt, used over and over, eventually becomes a permanent part of your capital structure. This is why, at Preference Capital, we have the means to steer clients towards cheaper products as our relationship with the client progresses.

We have also seen margins fall during Covid. Some business owners have used Covid to restructure, cutting expenses such as labor and rent. However, our labor laws make it difficult for any business to significantly restructure because your two biggest expenses are wages and rent. Landlords have traditionally bullied small business owners by demanding turnover clauses in their tenancy agreements, but now – with commercial properties struggling for tenants – it’s the business owner who has suddenly some bargaining power.

What should some owners consider when trying to manage their cash flow?

If you are in a growth phase, you will need capital. You must choose to finance your growth with equity or with debt. Stocks are more expensive in the long run.

If the business is in financial difficulty, should it seek a loan? The short answer is no, which may seem odd to us because it’s our business, but what the company needs is to look at the cheaper options that are available. For example, if the owners of the business have unsecured property, then bond that property and raise funds accordingly. It’s cheaper and more flexible than most other forms of financing.

Keep in mind that virtually all companies have gotten to where they are in debt. However, you have to be careful with debt because it can take root in your capital structure, and you want to avoid that.

Why is it so difficult to manage cash effectively?

Managing cash flow is easy, but business owners get into bad financial habits, typically overspending, ignoring issues like cash flow, and failing to build a war chest. What if we had another riot in July 2021? Entrepreneurs are generally oriented towards the positive side, when a more conservative approach might be warranted. In South Africa, we are building the greatest restaurants in the world. If a small restaurant is doing well, it might make sense to replicate another small restaurant, rather than planning a giant 200-seat restaurant that you can’t fill when times get tough. People want to make money fast, which can lead them to make irrational decisions.

What is the current financial environment in South Africa post Covid lockdown and how can this affect cash flow management in a business?

The current environment for SMEs is fragile, but there are opportunities. Cash is king right now, but you have to manage it well. Those who manage their cash well, who tightly control their debtors, control their expenses and build up a war chest, could do very well in the next few years. If we can educate people to use cash correctly, then we see huge opportunities. I think it’s important that business owners who have survived the past two years congratulate themselves. I’m sure we’ve all learned valuable cash flow lessons during this time. Now, it’s important not to fall back into bad habits and start planning for the longer term, for the next 5-10 years.

Presented by Preference Capital.

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