Over the past few years in business, I've noticed something very peculiar. An extraordinary number of black-owned businesses do not factor in working capital when making operational decisions from month to month. In essence, working capital is the investment (money) required for a business to operate on a day to day basis, over a certain period of time. It is largely represented by cash resources, debtors, stock, creditors, including an appreciation for the day to day operating expenses such as salaries and rent. My initial thought was that these cases were isolated but as the years continued and I was exposed to more and more black-owned businesses, I realised that the issue is extremely pervasive and needs to be addressed. Those most affected are usually staff, the lifeblood of any successful enterprise. So let's hypothesize around the root cause of this lack of discipline and advance practical solutions on how you can avoid making the same mistakes as your business grows.
Business school starts early
Over the years, my appreciation for experience and exposure has grown exponentially. Theoretical knowledge is great, but it cannot be compared with or traded for the practical experience one gains from running an enterprise. Historically, black South Africans could not own or run significant businesses due to a myriad of laws prohibiting such enterprises, or not making it commercially viable to do so. The result: a multi-generational opportunity cost of serious business knowledge. The primary manifestation of this is the lack of black founded and owned businesses of significance, 22 years into our democracy.
Most successful business people I come across do not have any forms of formal business education. In fact, a significant number barely have more than a diploma to back their name. More often than not, they would have been afforded an opportunity to join their father's business, often with this journey beginning as a toddler, following the old man around and mostly getting in the way. The lessons would continue at the dinner table, where one would engage in conversations about the business whilst at school. Vacation work was simple, as one would merely do the menial work in the business until it was time to officially join the ranks. During the first few years of actual employment, they would rotate in and around the key operational segments of the business. Once they had a handle on operations, they would then be exposed to the finances of the business, eventually progressing into management, where they would be privy to the strategic functioning of the enterprise. Ultimately, when the old man is tired and wants to take a back seat, they would pick up the reigns. The knowledge accumulated during this time is invaluable, knowledge that many black businesses owners today have never received.
BEE and the single invoice culture
Just the other day, I was having lunch with some friends, when one remarked that they hadn't been paid in the last month. My friend continued to explain that there was an invoice that was due to be paid at the end of last month, however their client had delayed the payment to the 15th of the current month. The said client contributes circa 75% of the company's revenue, and what I assume to be a bigger percentage of the bottom line. Naturally, I had questions, chief of which was: "Have you prepared your resignation letter?"
The result of this is businesses that are highly geared from a cash flow and customer perspective. Operational risk management best practice is nowhere to be seen, as cash flow prudence and customer diversification is seen as an unnecessary drain on potential returns.
The current context in which BEE is envisaged to operate within, together with "tenderpreneurship", has created a myopic operating culture among black business. Too often, as an aspiring black businessman, you'll hear legendary tales of deals or tenders which paid back multiples of invested capital in record time. These legends would be light on detail but heavy on theatrics, raising expectations of a big payday wherever these stories were heard. The result of this is businesses that are highly geared from a cash flow and customer perspective. Operational risk management best practice is nowhere to be seen, as cash flow prudence and customer diversification is seen as an unnecessary drain on potential returns. Unfortunately, business is done in the real world, and in the real world things do not go according to plan every time. If that customer doesn't pay the invoice, at best you're often left with no business, at worst you're left with the burden of trying to explain to your significant other why the bank is taking your home.
It's all about the people
The worst mistake to make after a client misses a payment is to not pay your employees on time, particularly as employees do not share in the upside in your business. For their time, effort and skills, all they ask is that you pay them what is due when it is due. Oftentimes, they'll structure their lives around this income, with debit orders, grocery shopping and school fees all scheduled to coincide with pay day. When you don't pay them on time, you're not only eroding the trust relationship that is implicit in being paid one month in arrears, but you also potentially setting off a nasty chain reaction in their personal lives too.
Always remember that your employees have not taken equity risk with you in your business, so it's important that you prioritise them before any of your other overhead costs.
As an employer, you need to be cognisant of the fact that the agreement between yourself and your employees is the most sacred agreement you have in your business. Treat your employees well and you never have to worry about your customers. Always remember that your employees have not taken equity risk with you in your business, so it's important that you prioritise them before any of your other overhead costs. Reason being, your employees are mobile, the talented ones more so and new employment is a not so distant threat for you and your enterprise.
Working capital management 101
Great working capital management begins with a plan. As the saying goes: "If you don't have a plan, any road will take you there." What the saying doesn't mention is that some of these roads are extremely painful on the wallet and the soul. So in an attempt to spare your finances and general well-being, always have a contingency plan.
Always remember to have a margin of safety which is commensurate with the risk inherent in your customer profile.
The plan often takes the form of a budget, which includes a forecast of how much business you anticipate over the coming 12 months, on a month by month basis. If you're in an annuity type services business, it'll most likely be a margin above the prior year. If not, you'll have to use a more nuanced approach given the opportunities you have and the likelihood of converting those into revenue generating business. Once you've established the plan, you then need to assess the resource capacity required to execute on your plan. This will vary depending on the nature of the business. In a services business, you have to assess the number and skills make-up of the talent required. Other businesses may require a detailed analysis of manufacturing capabilities or stock levels.
In analysing working capital requirements, one needs to assess the cash collections for the month and compare these to the anticipated cash disbursements. The cash collections will largely depend on the terms you have agreed with customers. Always remember to have a margin of safety which is commensurate with the risk inherent in your customer profile. Keep this analysis as a living document, updated for circumstances as they change. This should keep you one step ahead of the game.
Lastly, always have a contingency plan. Speak to your bank well in advance and share your plans with them. The mere fact that you have applied your mind to your cash flow projections will give them great comfort in supporting you when you need them. So next time you're in need of working capital funding, don't get it from your employees, get it from your bankers!