With South Africa in recession, along with the recent downgrades by ratings agencies, it is now imperative for businesses to look for innovative ways in which to extract savings through more effective management of their working capital.
Savings from a business sense is possible through a variety of options, such as organising cash flow and liquidity effectively, handling your debtors better so that money comes into your account quicker, enabling the business to meet its obligations on time, and saving through paying less on overdraft balances and also being in a position to transfer excess liquidity into an appropriate investment account.
Gone are the days when it is 'business as usual'. Businesses will have to tap into the latest available technology and data to become more efficient and equipped to ride out the economic storm. In these times, it is prudent to look to the business for savings through efficiency.
South Africa finds itself in challenging economic times, but to overcome the potential pitfalls that lie ahead, it is important to understand how your business and cash flow will be impacted by the recession and downgrades. This knowledge will enable businesses to plan ahead and implement measures that will ensure savings so that your business remains sustainable.
Businesses will have to tap into the latest available technology and data to become more efficient and equipped to ride out the economic storm
Identifying and understanding the following risks to your business are crucial:
- Currency risk: The volatility of the rand increases the risk to businesses dependent on cross-border trade. If you are importing or exporting goods and are concerned about the volatility of the currency, it would be advisable to discuss your position with a global trade specialist to ensure that your overall currency risk is managed.
- Inflation risk: With a weaker rand, inflation will most probably increase, resulting in higher input costs. This will put further pressure on your cash flow.
- Interest rate risk: Rising interest rates will increase the cost of borrowing, which will also put pressure on your cash flow, and so it is important to optimise the flow of cash through the business and minimise interest paid.
- Turnover risk: The purchasing power of the consumer will be affected severely by the higher cost of debt as well as job stagnation and job losses, resulting in a drop in sales and turnover. As a consequence, there could be pressure on business turnover.
- Counterparty risk: In tough times, most businesses will be challenged and whether you are dealing with local or international suppliers or customers one must always be sure that if I pay, will my goods be delivered and if I send my goods will I get paid.
In such challenging economic times, and in the face of these risks, businesses have little choice but to manage their cash flow and liquidity requirements more efficiently. Having access to cash reserves is probably the best way to safeguard your business in tough conditions, as the downgrades could mean that the cost of borrowing will become higher.
Another option of managing cash flow is through effective debtor and credit management, which allows businesses to receive funds quickly and also extend creditors' payment terms, where possible.
Given the challenges for the economy, businesses have to look ahead at the pitfalls and plan better to extract savings so that they can survive the tough economic climate South Africa is currently experiencing. Ultimately, a business should look to reduce the overall relative cost of borrowing and increase the interest earned from excess cash on hand whilst also managing the risks associated with a volatile currency.
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