As individuals, we are taught to save. An old adage is, one should save three times there monthly salary in cash equivalents, before embarking on further investments. This will allow one to have three months of recovery in tough times.
We should apply the same saving principle to our business. There is a tendency to draw every last cent out of a business for personal use. Often business expenditure is too high to allow for saving leaving our cash flow in a much to be desired state. With the additional funds collected from debtors, above monthly expenditure, there may be a window of opportunity to save.
The way forward:
- Pay off unnecessary loans both business and personal.
- Save in your personal capacity so that you have three months income in a money market account or the like. These savings will cover unexpected personal expenses and thereby reduce the impact of personal drawings from the business.
- Save three times your fixed business costs. (fixed costs are those monthly recurring costs that will not vary with changes in income.) This will ensure business stability and reduce the bank overdraft substantially.
- Save monthly for VAT by reviewing the VAT Control ledger often. A VAT return payment will then have a minimal impact on your cash flow.
Saving improves the cash flow and stability of your business. Saving builds credibility. Banks will look favourably on a business that handles financial affairs wisely. Business' need to start receiving interest and not continuously under the burden of overdrafts and heavy interest charged.
E.g. An individual with a monthly income of R50,000.00 should have savings of R150,000.00 in cash equivalents. If 10% of the individuals monthly income is saved, R5,000.00, it will take less than 30 months to achieve the target of R150,000.00. Interest will obviously speed this process up. 10% interest on R150,000.00 is R15,000.00 p/a.
If a business has an overdraft of R50,000.00. The interest on the overdraft facility at say 20% is R10,000.00 p/a. A loan from the bank for R50,000.00 with an interest rate of 12% will cost R6,000.00 p/a. Using a bank loan instead of a bank overdraft will save R4,000.00 p/a. Reducing your expenditure by R5000.00 per month or generating further income will ensure the loan is repaid within the year. Most often the facility will remain in tact for emergencies. In fact, if the R15,000.00 from the savings account plus the R4,000.00 saving from changing from an overdraft to a loan will mean there is an additional R19,000.00 available in year one to repay loans. In year two, There will be an additional R25,000.00 available from interest saving on not using the overdraft facility and interest earned on savings. This simple example illustrates the value of not having a bank overdraft.
Plan ahead to determine what your financial needs will be in the year. Save whenever you have the opportunity to.