How do you make sure that your cash flow is always healthy?
As an SME owner or exec, you won’t always have time to oversee every little detail of your business, including your cash flow. Sometimes, neglecting these little things end up causing serious problems.
Business is good. Life is comfortable. One day a large order comes in and suddenly, there’s no cash.
Payroll starts to get delayed. Your suppliers are doubting you. And the current building has electricity issues and leaky roofs but you can’t relocate.
Every year, 8 million small businesses go bankrupt due to an issue with cash flow.
Implement these steps today to avoid any potential problems.
1. Have Realistic Cash Flow Forecasts
A cash flow statement is one of the most reliable ways to measure the strength of a business. A common mistake many small businesses make is being too optimistic in the forecast. Having a conservative policy on estimates is good practice when trying to maintain a healthy cash flow. It pays to have an aggressive outlook when it comes to expansion activities. But it will be worthwhile to have honest figures in your forecasts.
It pays to have a realistic estimate when it comes to your receivables and payables. Do you often have to chase your receivables? What about your own capability of meeting receivables? Be realistic. It may not feel good at the moment, but it will pay off for your cash flow in the long term.
Also, consider hiring an accountant to help ensure you meet your tax liabilities. The IRAS will still come knocking on your door even if you’re an SME. Especially if your SME is a rapidly growing one.
2. Control Your Outflows
When the business was still a baby, keeping track of expenses was a breeze. You could keep count of every single penny that went in and out and manage your cash flow down to the minute details.
As it grows, you no longer have that luxury.
Consequently, things start to get out of hand. This can be avoided by implementing the right systems. This can be done by hiring an accountant you can communicate regularly with, or by getting a consultant to help you build a system.
Here are a few other things you could do to manage your expenses today.
A direct mail business saved over $100,000 just by consolidating their print & mailing houses into a single company. Look at your list of expenses and try to get one employee to track each type of expense. This can help manage your expenses and ensure there are no unnecessary costs.
You can also look at your current list of software subscriptions. Technology is ever changing and you could easily find yourself using a certain software for a high price which another company offers for free. Do your research and be willing to take up trial offers. Certain services may sound really attractive at first but can end up not really benefiting your business for the cost.
- Take Control of Your Inventory
You don’t necessary want to be in the position of having an excellent book value. Sometimes most of it is tied up in stocks. Accessing it can take 3-6 months which can easily spell disaster for your business in times of need.
- Liquidate where possible
Do an audit today and sell off whatever you don’t need in the short term. Also, see what other assets your business is sitting on that you’re not utilizing. It could be land, capital or receivables. Having a fat book value may sound attractive, but things can get messy pretty quick. Especially if your employees need to wait 4 months before getting paid,
3. Increase The Speed of Your Receivables
Having no cash can make it impossible to introduce innovation into the business. And things only get harder as the day-to-day expenses get tighter.
Receivables can be a real headache especially for SMEs. The sooner you start improving the rate of your receivables, the sooner you can start taking up larger clients.
Here are some ways you can accelerate your receivables :
- Remind Often
Be ‘that’ business. Give them a call gently reminding them of the payment date. Have frequent touch points with calls. Emails work but calls are often more convincing.
- Introduce Penalties
Some companies may need a stronger statement than others. Make it clear that you are serious about payments. The lack of proper penalties in place for debtors will make it difficult to follow up on receivables. Companies might take it as a sign that they can keep delaying payments without consequence.
You could try a progressive creeping rate of penalty that goes from 1-2% to 10%. When you’re on the brink of a crisis, being ‘nice’ isn’t the first thing that comes to mind.
On the softer end, you could also ask for deposits as a sign of commitment. If they can’t pay your deposit, it says a lot about their ability to be a worthy long term client. If you currently have clients like this, it may be time to drop them.
- Introduce Incentives
A simple yet effective solution that is often overlooked. Just like penalties, you could implement discounts to early payers as low as 2%. Sure, it may affect your bottom line but look at the benefits to your cash flow and make a decision after.
4. Have a “War-chest”
Having a cushion of cash to fall on is the ideal situation to be in. Resist short term expenses that have little to no impact on the long term operations of a business. This can really help you prepare for difficulties in the rainy days.
A war-chest can also be used to service day-to-day operations in a smooth manner. You can meet payroll on time ensuring they don’t all leave you. Keep them well taken care of and they will take care of you. Ensure the locations or capital that needs maintenance is maintained regularly. This makes sure your business actually runs regularly. You don’t want to cut cost where it harms you.
You also get to be your supplier’s favourite client if you go the extra mile to pay on time.
Having cash in hand also helps you in especially tight spots. For example, helping you against small-time lawsuits that can pull you into a deep hole before you even know it. If your biggest client winds up, you’ll have enough stashed to float while regaining your ground. The same goes during the slow years of business.
At the end of the day, steps like these are easier said than done. And truth be told, even the best of businesses aren’t safe from human errors and certain circumstances are just impossible to avoid.
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