Financial Times

Cash flows the key to small business
By Nilooka Dissanayake
If you are thinking of going into business, these are the keywords for you to remember. Forget profits. Forget everything else. Remember cash flows. Let us consider the story of Mrs. Silva. Mrs. Silva is a housewife who decided to supplement her family income with a little business at home. She wanted to make 100 sandwiches every day and sell them to school canteens.

When she calculated her cash flows, would you believe that she needed to spend over Rs. 20,000 a month to arrive at a meager profit of around Rs. 2000? This was a big shock to Mrs. Silva. At least Rs. 20,000 was needed to buy bread, butter, chicken and other fillings and for the three wheeler fare to deliver the sandwiches until she got paid at the end of the month.

Since finding Rs. 20,000 to invest over a month was not at all realistic, Mrs. Silva decided to look at her cash flows again, very carefully. This time round, she realised that she could buy on credit because she would be a regular buyer of large quantities well, relatively anyway.

She could also get money weekly from the canteen operators because, after all, they always sold for cash. She could pay for the three wheeler fare weekly if she came into an agreement as a regular hire.

What was Mrs. Silva doing? She was changing the order of cash flows. She was changing their timing. She was delaying by negotiating with suppliers. The inflows-of what she was getting as cash into the business from sales, she discussed at getting it more regularly than just at the end of every month. The net result was that she could start the business with just a little money than she had according to the earlier calculation.

On the other hand, look at profits or losses. Profits or losses are, very simply put, the difference between the expenses (cost to you) and the income. If income exceeds expenses, you have a profit. Otherwise, you have a loss. Sometimes, if both are equal, you have a break-even situation.

In the long run economists think it's five years or so - it does not matter so much. But, for a small business with only so much money to invest to get started and go on, short term cash flows are a matter of life and death. In the short term, they are more important than profits.

For example, if the canteen operators tell Mrs. Silva that they can only pay her in 60 days, that means she has to keep on spending money to the amount of Rs. 40,000 before she sees any cash at all. They may promise her a bigger profit for each sandwich, but a bigger profit at the end of two months does not help her get started and to keep going. No. She will have to forget this idea.

On the other hand, if she decides to get a loan from somewhere to help her tide over this period, then that added profit should compensate her for the loan interest also. Because of this, some business ideas that look really attractive on the surface may prove to be not so good, especially if the cost of finances (loan interest and all) are considered.

Often, the start-up businesses forget about this aspect. Actually, they forget about most expenses such as phone bills, electricity bills, stationary costs and travel expenses when they look at business ideas. Forgetting them will mean a sure recipe for disaster because, then you will not have profits even on the long run.
Besides all this and the real profits you expect, you also need to look at timing of cash flows.

Cash flows are important for the continuity of every business regardless of size. According to Tilak Padmarajadasa of Management Frontiers, in considering the viability of your business model, you need to match your cash inflows and outflows.
If you cannot find a way to do so, your business model is not a sustainable one.
The bottom line is that in starting a small business you need to look at cash flows carefully and ensure that your business model is sustainable. If the profits seem attractive and cash flows are uncertain... just forget it!

We welcome your comments. You can reach us on ft@sundaytimes.wnl.lk or call on 075-552524. The writer is the Managing Editor of Athwela Vyaparika Sangarawa (Athwela Business Journal), the only Singhala management monthly targeting the small and medium sized business operators and its English version, Small Business International magazine.

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