When a group of entrepreneurs invited me to give a talk on cash flow management; I thought I would be useful to start by discussing the different sources of cash available to any business. The discussion on sources of cash for a business struck a chord with many of the participants, which convinced me that the matter is worth sharing with the readers of this column too.
Every business, irrespective of its age or sector, has five main sources of cash; cash sales, credit sales collection, equity injection, suppliers, credit and debt.
A cash sale is the most important source of cash for the business. Any business that wants to be successful must desire and be committed to selling most of its products or services in cash.
In fact, some businesses go a step further and convince their customers to make prepayment before the product or service is delivered.
Take the example of mobile phone airtime; many users first pay for the airtime and then use it. Now Umeme has introduced Yaka so that its customers make cash prepayment.
The older generation will remember a cartoon that shopkeepers liked hanging in their stores showing two men; one appearing very skinny with the caption ‘I sold on credit’ and the other man with a glowing skin with the caption ‘I sold in cash.’
Credit sales collection is the second source of business cash. The shorter the time taken by people who owe the business money to pay back, the better for the business.
Unfortunately, many businesses give credit blindly without any policy or guideline in place. The end result is that the business ends up with uncollectable credit sales so that while the business appears to be making money on paper, in reality, it is losing money.
Businesses also get cash from equity injection by the owners. This can be capital injected at the beginning of the business or additional capital provided when the enterprise is already in existence.
Another important source of business cash is suppliers’ credit. Some years back when I started a new business a friend helped me to arrange for supplier credit from the office landlord. The friend negotiated with the landlord so that I paid the rent after using the office for three months.
In most cases, people pay rent in advance but in my case, I was paying it arrears. Suppliers will extend credit to your business if they have the assurance that you will pay back in the agreed time. Also suppliers extend credit so as to boost their sales.
The last major source of cash for a business is debt; this could be a loan or overdraft from a formal or informal lender. Lenders want repayment for the principal and interest on their debt and the only thing that repays debt is cash.
A start up business has uncertain cash inflow and for that reason, it is not a good idea to use debt to finance a start up business.
James Abola is the team leader of Akamai Global, a business and finance consulting firm.