There is always the talk on being income rich but asset poor. It’s a different ball game in your personal finance, which we may or may not talk about, compared to when it comes to a business.
If you want to maintain liquidity in your business, the first thing you must do is not confuse profit with a positive cash flow position. Cash inflow only mean that you have money to operate the next day and this is the most important thing for a business. This is just one of the many mistakes small business in Kenya make when it comes to liquidity.
Staying liquid is an issue of good financial management with variations depending on the circumstances your business is in. But there are guidelines that are useful for every business:
1. Take full advantage of your repayment period
Many entrepreneurs try to game their suppliers by paying them earlier than the agreed time. This has little effect on how they perceive you, it will only register if you do not pay on time. When you make early repayments, you drain money from your business for little gain. It’s better to direct that cash to business projects that will boost your revenue, such as training, or to your cash reserve.
2. Come up with a savings plan
Speaking of cash reserves, we answered the question of just how much money you should save in your business to avoid cash flow problems. You should always review how much you save depending on your forecasts and actual business performance. A business that anticipated a contraction this election year, for instance, would save to cover for the fact way earlier. It won’t make you smile at poor performance but you’ll sleep better knowing you’ll come through it.
3. Focus on your best customers
Acquiring new customers is expensive. It is also expensive and draining to keep following those customers who do not pay in time. You can reduce, to an extent, all this trouble by incentivizing your favorite customers to buy even more. It’s part of the classic advise of improving your strengths instead of your weaknesses – one Kenyan woman is living this. You can give them a little bit of discounts and offers to minimize effects of slow repayments.
4. Sell the computer, desk, vehicle, etc.
Note: sell of business assets to cover for liquidity should only be an emergency measure. Business assets improve your productivity, therefore, getting rid of them will undermine your productivity. If worse has not come to worst in your business, you can also get rid of old or costly assets that are burning up money. Depending on how dire things are, sometimes you will have to accept to sell at a lose.
5. Reduce operating costs
This will definitely have the biggest effect on maintaining liquidity. The problem is that many entrepreneurs in Kenya overlook areas where money is being lost like the cost of using your phone or refusal to go paperless. There is also failure to look at costs during the good times. The secret to success is to be negative in private, always look for areas to improve. By the way, how much money do you spend to read this website? It’s okay, don’t answer because it’s worth it 😀1