Putting money away for most entrepreneurs is a big ask, especially under the current economic conditions and the myriad of challenges business owners face daily.
Small business owners for example struggle with access to markets, access to funding, extremely long payment terms for goods/services supplied to public and private sector organisations and poor financial management. Amongst the many challenges entrepreneurs face, managing cash flow is like an extreme sport. A battle that is fatal to the survival of many businesses.
In its Monetary Policy Statement dated 28th January 2020, the Central Bank of Lesotho (CBL) reports that economic growth in the country remained low, growing only by 0.1% in November 2019. On the contrary, inflation grew from 4.6% to 4.8% in December 2019.
Inflation is the rate at which the average price of goods and services increases over time. It is no secret that things are difficult for many businesses in the country. Worst still, is the likely probability of these conditions remaining the same for the next couple of months, putting more strain on businesses.
Running a business is without a doubt difficult. Especially with the changing business landscape in Lesotho. Each day presents a new set of challenges for entrepreneurs, making it harder for many to survive.
In trying to run and manage my business TKO Consultancy, I’ve often had to subsidize some monthly expenses using my salary from my 8-to-5 because I did not have any savings. Had I put away say 5% of the little sales generated by the business, dealing with such challenges would have been easier.
In a conversation with Manisha Black, owner of Black Mix Lesotho she highlighted how difficult it is to get through some months like December and January where sales are slow (depending on the type of business), rental expense is payable in advance and business owners still need to pay salaries, bonuses and operational costs. She emphasised the importance of saving money for days when it’s a struggle to make ends meet due to the reasons mentioned above.
So, why is it important for entrepreneurs to put money away and survive these trying times?
Plan for seasonality (slow months)
Every business (depending on the industry it operates in) has months when sales are slow, e.g. June to August for ice cream businesses. It can be stressful for entrepreneurs to meet their monthly commitments when sales are low, whilst operational costs remain the same.
It is vital for business owners to understand their business cycles and plan accordingly by putting money away. Building up cash reserves to cater for these periods can help reduce the stress levels. Business owners can save a percentage e.g. 10% of their monthly sales (especially when business is booming) to build up reserves for the tough months.
The funds can be parked in interest bearing accounts such as business call accounts available from commercial banks or in money market funds offered by asset management companies.
The benefit of having such savings is the ability to quickly access the funds when you need them most, while generating interest income when there is no need for them. Depending on the type of business you are in, you can also use these funds as collateral should you need to bridge your finances e.g. temporary overdraft to get through the tough months.
Be sure to compare the cost of borrowing vs. the interest earned on the call account or money market fund to make sure your financial decision is sound. Speak to your business banker for suitable options for your business.
Build up an emergency fund
With the dynamic environment businesses operate in, it is becoming necessary for business owners to plan, adapt quickly and adjust many variables. Business finances are a key component of this.
Building up an emergency fund to cover three (3) times your monthly operational costs, i.e. rental expense and salaries should your suppliers not pay you on time is vital. This level of planning gives you the peace of mind to focus on what you do best- running a business.
Building this fund is not easy, given the number of expenses that need to be paid and the declining sales as a result of the economic challenges. Business owners therefore need to have a solid plan when calculating how much they can afford to save monthly. Sit down with your accountant and business banker to come up with a solid plan.
Build up reserves for bonus payments in December
Depending on the size of your business, the number of employees and the remuneration policy, some business owners usually pay out bonuses during December. This cash outlay can have a huge impact on the business cash flow if not planned for.
Business owners can consider saving up for this well in advance by putting money away from January to November in order to cater for such expenses.
It is important to place this money in interest bearing accounts, to be mindful of the costs associated, tax implications such as withholding tax on the interest earned and lastly how easy you can access the money. You wouldn’t want to get to December and not be able to pay your employees their bonuses because you cannot access to money.
Conclusion
I am of the view that if we can plan and navigate the money issues early, we can reduce the money stress many entrepreneurs like myself face. Not ignoring the many challenges entrepreneurs face in Lesotho, my belief is that if we intentionally commit to put money away whenever possible, placing it in interest bearing accounts and consulting our business bankers regularly; we can grow and move our businesses forward in 2020. It starts with understanding your business cycle, planning and adapting to the changes. Let’s get saving!