Cash is a very important lifeline in any business and determines the difference between its existence, expansion or failure, but forecasting sufficient cash flow remains a guessing game, he says. “Entrepreneurs can plan for the worst case scenario, but there is a possibility something can blindside the business out of the blue … (so) it’s vital to have a contingency plan in place, whether it be in the form of a business’s savings account or its ability to access additional credit at ease, such as having a bank arrangement in place,” he says.
These are worst case scenarios, but smaller incidents have also caused the closure of businesses, such as too many sales orders, and too little cash to manage them. “One of the biggest challenges entrepreneurs face is funding and cash flow, and mismanagement of these vital elements is responsible for causing a majority of businesses to fail within their first year.”
Effective cash flow management allows a business to estimate the amount of cash readily available at any given time, projects trends in cash inflow and outflow, as well as evaluate if a surplus or shortfall in cash could potentially occur.
Entrepreneurs need to have an organised approach to cash flow management, says Engelbrecht. “Entrepreneurs need to keep track of every incoming and outgoing payment. They also need to understand the difference between profit and cash flow, as although invoicing a client for a sale or service rendered creates revenue, only actual payment on that invoice creates cash,” he says.
Also, not all income is profit as production expenses may still need to be paid.