Financial Planning

Critical need for SA SMEs to have an emergency fund

By: Business Partners Limited

One thing that the COVID-19 crisis has highlighted in the small and medium enterprise (SMEs) sector, is just how many businesses were surviving on a month-to-month basis. In a recent survey conducted by Stats SA, 30% of formal businesses surveyed indicated that they were unable to survive a month without turnover, while over half (55%) indicated that they could only survive between one and three months.

Jeremy Lang, Regional General Manager at Business Partners Limited (BUSINESS/PARTNERS) – one of Africa’s leading financiers for formal small and medium owner-managed businesses – says that these statistics highlight the need for South African business owners to build up a sufficient cash cushion.

“Unfortunately, this year’s National Savings Month came with a tough lesson for many local business owners that are currently struggling to keep their doors open. While it goes without saying that these are unprecedented times, and businesses are doing the best they can with the cards they’ve been dealt, the COVID-19 crisis has served as a stark reminder to always have some funds saved up for rainy days (or, in this case, rainy months).”

He advises that from inception, businesses should create a culture of setting aside savings for financially stressful periods. “When spare capital becomes available, business owners naturally tend to invest in productive assets rather than cash reserves. Although in normal conditions this would be a sound strategy, it is critical that decision-makers first consider building a cash cushion to provide for short-term liquidity needs that may arrive unexpectedly.”

Lang says that one of the primary reasons businesses fail is due to a lack of sound financial footing, especially amongst highly leveraged businesses. “These businesses typically have fixed financial commitments, which place undue pressure on operations and make the business more vulnerable to volatile changes in market conditions.

“Financial pressures, such as we’re currently experiencing, would therefore result in the focus of the business shifting to satisfying short-term financial obligations, rather than focusing on long-term prosperity and growth.”

At the very least, Lang says that a business emergency fund should consist of two to three month’s net income. “This means that business owners need to start saving on a monthly basis in order to reach the short to long-term goals of their company, which will ensure that the business doesn’t come to an abrupt end at the first sight of business interruption.

“Only when a strong savings culture is established among local businesses, will the SME sector be truly futureproofed. This, in turn, will help to safeguard the continuity and growth of South Africa’s economy,” Lang concludes.




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