Coming off a very strong festive trading period, popular township fast food outlet Kota King witnessed slower January foot traffic, while supplier and operational costs remained high.
Without resorting to increased borrowing, the business realigned stock purchasing, ran sales on a cash-only basis, and engaged suppliers around payment schedules aligned with expected revenues. In doing so, the business was in a position to stabilise its cash flow position without increasing debt.
“Those SMEs that address their debt burden early, communicate openly with suppliers and manage credit conservatively are better positioned to rebuild their cash flow and prepare for future trading opportunities,” said business expert Paul Meyer.
The South African economy has many SMEs whose spending by consumers seems to reach a high during the holiday period, yet the gravitational effects of supplier financing terms and rapid short-term borrowings are realised in the month of January.
“Cash flow problems and not poor sales are some of the main causes of small business woes in the aftermath of the holiday period,” says Dr Azar Jammine, the director and chief economist of Econometrix.
In fact, most small businesses do not account for the rapid change in spending that comes with the end of the holiday period. The milestone of better understanding outstanding borrowings has been an important one in the turnaround journey of an SME. Janice Johnston, head of business banking at Nedbank, reveals that SMEs do not consider supplier credits and overdrafts in the overall financial position despite the existence of the latter as formal liabilities.
Head of SME solutions for Standard Bank South Africa Kagiso Mokwena, said renegotiation with suppliers on payment terms is often recommended as a wise thing to do, generally they are willing to negotiate repayment. Mokwena further argues that it is probably going to be more desirable to stagger payments or extend the payment date instead of having these payments default due to the suppliers when the new year sets in, and the suppliers themselves might be experiencing difficulties in their working capital flow patterns. The other sector that should be given equal prominence is the handling of the overdraft and credit facilities.
The CEO of FNB Business, Mike Vacy-Lyle, has in the past indicated that their customers should use their overdraft facilities for short-term funding and not working capital. It has been pointed out that if debt is sourced from credit, then one becomes dependent on credit due to the cost of finance.
Nevertheless, it is also warned by experts in relation to the potential loan risks in January that the SME businesses should be cautious about. Ketso Gordhan, CEO of SEDA, said instead of solving financial problems, short-term loans depicted by a high interest rate, as well as alternative loans, might increase financial problems in SME businesses.
emily@vutivibusiness.co.za
