How to cope with working capital challenges in this illiquid economy

The problem is acknowledged throughout the world: in difficult economic times, the successful management of cash flow and working capital is often crucial to business
success – even to business survival.
The Zimbabwean economy is still a long way from recovery. Dozens of entrepreneurs and SMEs send me emails weekly describing how the lack of liquidity is crushing their entrepreneurial spirit and preventing them from growing their businesses.
This problem is not unique to Zimbabwe. In the Western countries hit by the global recession the story is the same, and in some cases worse. And entrepreneurs need to go back to basics. Ben Bernanke, Chairman of the Federal Reserve, recently said.
that “shortening the cash cycle and better use of working capital” is the most important factor as private sector organisations struggle to overcome current economic volatility and the increasing difficulty of accessing capital markets.

That’s also the view of the IBM Institute for Business Value. It says that the current environment is “placing unprecedented constraints on access to credit and capital”, and there is widespread agreement that “cash flow and working capital management will be central to survival, growth, and strategic flexibility”.

The major problems facing Zimbabwean SME’s is the lack of cash in the business to meeting operational needs (such as marketing and operating expenses,purchasing stocks etc) and the unavailability of affordable loans to cover the cash gap. It has already been said before by numerous entrepreneurs (not economists by the way), that the cost of funds in Zimbabwe does not allow for profitable business. So, how can one solve the cash problem without resorting to expensive buying?
Here are a few tips:
1. Get more good customers:
Instead of accepting the “average” customer who will try to push your price down and also give you a hard time when it comes to paying, look for high value customers who appreciate your product and service and are willing to pay more for higher value. Good customers know you are in business and will not try to bankrupt you through cutting your margins or delaying payments. Most are even willing to pay upfront. So, change your marketing strategy to attract high end customers- Mercedes Benz customers instead of Toyota Spacios.

2. Sell more higher margin products:
Most of us want to do easy business; something that someone else is already doing or selling. Unfortunately the rules of markets and economics dictate the obvious: less pain less gain. Change to higher margin, not so easy to supply products and services. This calls for innovation and creative thinking. Deliver products and services that people really need and are willing to pay for, real wants and needs.

3. Focus on cash generating activities:
Both performance management and incentive mechanisms should focus on workign capital and cash. Reward sales people who bring in quicker paying customers. How fast do you convert sales to cash? And how fast do your suppliers expect payment? That gap is what you should be concentrating on in order to maximize your cash inflow.

4. Educate yourself to understand working capital management:
Very few entrepreneurs understand the workings of working capital and cash flow. The realities of the new economy is that the key difference between organisations that successfully meet the challenges of the current economic situation and those that
don’t is their ability to adopt the practices, processes, and technologies which increase their understanding of working capital performance. The challenges are great, the penalties for failure severe – but the opportunities for success are there to be seized.

To survice and grow in this economy it is vital to get down to the basics of business: understand the finances; actively manage your working capital and cash; engage in effective marketing that brings in more and higher value customers; provide the customer experience that keeps and bring in more customers; and learn to plan for the short and medium term. Keeping on doing things the way you have always done them will keep you getting the same mediocre results; change and start managing your business now.

You will find more resources you need to survive and grow your business at http://admiralbiz.wordpress.com.
You can now list your business profile where it will be seen by hundreds of other high performance entrepreneurs at the SME BusinessLink Community: http://smebusinesslink.wordpress.com

Don’t miss the SME BusinessLink Networking Breakfast on Friday 26 August 2011. Mr. Lameck Danga, the Head of Retail and SME Banking will be the guest speaker, you may ask all you need about how banks support entrepreneurs and get to know about the specific programs currently available to help you accelerate your growth. Don’t miss it; call Christine on 0772 854 301 to book your place. (Fee $12 for Gold Club subscribers and $20 for non-subscribers. Special offer for new subscribers: subscribe now and you will get free entry to this networking event).

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3 Responses to “How to cope with working capital challenges in this illiquid economy”

  1. Thanks trillions for the post and the ideas contained therein.Indeed if the above ideas are strategically implimented,they can result in more sales.Entrepreneurs should also strive for more repeat business from their existing customer database.However,to achieve that ,our Zimbabwean entrepreneurs need to fully meet all the requirements of human relations and customer service.A sasfied customer is more likely to come back to buy more from you.In the same vain,Zimbabwean entrepreneurs need to fully utilize the power of the internet so as to tap into world markets.The internet has the potential of bringing in not just local but international business as well.

    Thanks a lot

  2. Fantastic advise and great to have a networking forum like.

  3. Great post indeed.I agree with almost everything you said in the article.To add on to that,i strongly believe that Zimbabwean small businesses should never underestimate the power of internet marketing.
    I strongly believe that most online marketing strategies are really usefull and can be used with overwhelming success.Moreso,comparing traditional forms of marketing with online marketing,one would find out that online marketing tools are really affordable and at times free.The advantages of marketing any business online are outstanding.It is very rare for clients to seek products and services in the yellow pages nor Telone directories.If a consumer wants a certain product,they simply search on the internet.

    Even on this site,you are successfully using the power of online marketing.There is ni way through which we can compare this to the traditional forms of letter writting.Online marketing and the marketing tools associated with it are really affordable hence can really reduce marketing costs and to some extent boost profits.

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