The development of a savings culture is not only appropriate for individuals, but for businesses too, a financial expert said.

With July being Savings Month, it was right that South Africans begin to develop a culture of savings, according to Elize Giese, head of liabilities at FNB Business.

“Many small- and micro-businesses sustain a material proportion of every economy,” said Giese. “Small businesses are vital to economic growth, employment and innovation.

“Small businesses are small only in name and not the impact they have on peoples’ lives. The success rate (longevity) of new (start-up) small businesses is notoriously low. South Africa is no exception.

“Small businesses have their own peculiar difficulties to arise and stay afloat,” she said. “The multitude of hurdles is daunting; such as, building a rational business case, finding the finance, and then wading through all the compliance requirements and the associated bureaucracy. Staying in business often becomes a daily endeavour.

“Business school wisdom identifies a handful of reasons for success or failure of single-trader, partnership and other small start-ups. A primary reason for failure is variously defined as lack of cash-in-hand, lack of capital, or inadequate cash reserves.

“A colloquialism that describes this graphically is ‘that there is simply not enough oil in the machine’ to keep it moving, either from cash flow or reserves.

“One of the most difficult management decisions a small business owner will have to make, on an ongoing basis, is how to balance cash on hand (some form of reserve or savings) with funds (capital) to deploy in the business for requirements such as inventory, technology, marketing  and so forth.

“Experience reveals that a sustained mismatch between sunk capital and expenses, and lack of cash flow and reserves, results in business stress and possible failure,” said Giese.

Two forms of savings

“Small businesses face two forms of savings, namely, ‘expenditure efficiency’ and setting aside cash reserves. The former deals with managing costs including paying staff and suppliers – each outgoing rand turned over a few times, and maximum value derived from each rand spent.

“The latter involves keeping cash reserves to plug expenses gaps, fund projects or buy assets and moderate cash-flow mismatches. In some cases, owner funds may be used to finance business expansion, and supplementing loans, should that be a sensible option.

“In instances of a mismatch between financial inflows and outflows there is a business need to have immediate access to funds. Funds may be accessed easily and additional deposits made on an ad hoc basis.

“The first step in selecting the right savings and investment product is to understand your business cash flow. You must consider the volatility or stability of your cash flow projections. If income and expenditure are predictable and you know what your cash positions are going to be for the foreseeable future, then you should think about foregoing some liquidity and flexibility, and investing in longer term assets that provide for higher returns. 

“If, on the other hand, your cash flow predictions change from month to month, then you should rather consider shorter term investments that provide for more liquidity and flexibility, even if the interest rates received are relatively lower.

“Every business must provide for short-, medium- and longer-term cash needs to stay in business, and grow if that is an objective. Expansive order books do not pay the bills either. Cash in some form of savings vehicles should be readily available to manage demand for cash,” concludes Giese.

News24.com