SMEs are the lifeline of Singapore’s economy - they empower various industries and include a large portion of businesses. Nevertheless, there are plenty of challenges that are met by smaller businesses, especially when it comes to resources and capital. There's a lot to be said about cash flow because a firm that can manage and master its own financial health is bound for success, even through times of crisis.
The Covid-19 pandemic has provoked a global economic downturn that has been more severe than expected, and businesses have to take rapid steps to preserve liquidity amongst many other challenges they face today. It is thus necessary that cash flow management becomes an integral part of a company’s risk assessment and business continuity plan in response to the Covid-19 crisis.
Cash flow is so important that it can make or break a company, and it will also ensure a solid foundation for any post-crisis recovery. Here are a few key tips to consider for better cash flow management.
Hone down on pending invoices
When the economy is doing well and cash flow is not an issue, companies tend to be more lax about receivables. If your business model is the kind that racks up a heavy list of outstanding payments from clients, then it's time to start managing your receivables with meticulous detail.
Think about how banks manage their loan books - that's how managers and account departments need to start scrutinizing their unpaid invoices. Follow up on a consistent basis with a schedule for unpaid invoices. After all, it's key to keeping your business's finances healthy.
If you have receivables that need to be managed, then start having your bookkeeper or the team member in your business who's in charge of accounts run through reports once a week and contact clients who are past due. Inquire about their outstanding debts with you and don't be afraid to follow up with confidence. Over time, your clients would have established that you mean business when it comes to paying on time.
Look to the future and create a projection sheet
Cashflow is very heavily determined by the amount of strategy that goes along with a business's accounts. The less financial planning is involved in the growth of a company from the get-go, the less financially prepared it is to cater to growing overheads, acquired expenses and accumulated debt that is all sometimes inevitable. In this regard, it's important to prepare for the future and begin scouting for seasonal cash flow trends so you can plan for them.
Treat the accounting system as an ongoing history book and begin building a simplified but efficient weekly cash flow forecasting spreadsheet as a management tool that can offer insights about a business's future cash balance. There are plenty of businesses out there that use this strategy and it can be a very effective way to put your financial house in order. Some use forecast spreadsheets that stretch 13 weeks or more while others use a four-week time period.
During this pandemic, it is important to identify and quantify the impact on current financial position. Do a quick assessment of the short term and medium term financial impact, and update your business plans, budgets and forecasts to reflect any downturns in market segments, disruption to business operations, impact on workforce and assess worst case scenarios. Lastly, once you have a clarity on your cash position, you can then determine if any financing or additional shareholder capital injection is required and available.
Utilize invoice factoring
Businesses, especially SMEs, are often faced with a barrage of pesky expenses that are compiled over time. As a direct result, cash flow can be affected in a negative way, especially when there is very little financial management involved. Fortunately, there's a way out of piling invoices - just sell them.
Invoice factoring is the technical term for selling invoices, and it's described as a form of financial product which allows you to receive an advanced of up to 80-90% of any outstanding invoices you own. It allows you to “unlock” the money tied up in the invoices that are yet to be paid.
Invoice factoring differs from business loans in the sense that you can get cash already owed to your business and ensure that it doesn't take on any more debt. Reach out to a factoring company and they'll evaluate which invoices can be purchased. They'll pay you the funds so you don't owe the money anymore. However, this may be a relatively expensive option, hence you may wish to consider working with your customers to provide discounting solutions for those who are able to pay more quickly. Otherwise, this may be the best option to improve cash flow quickly.
Start prioritizing cash over profits
There is a difference between cash flow and business profits, and the more founders understand this concept the better off they are surviving financial dilemmas. In essence, profits comprise total sales minus the total cost of producing goods (which is referred to as variable costs). This is why profit doesn't necessarily lead to positive cash flow. If your aim is to improve cash flow, then naturally you need to start prioritizing cash.
This can be done in a number of ways, but the obvious one would be to shift your mindset and refocus on generating cash. Focus on strengthening cash flow by cutting variable costs and adjust your profit-generating activities towards generating cash instead. Offer exclusive promotions and discounts to customers, create low-cost and low-effort products that can make you money without having to spend too much on raw materials or repackage products and services for a consumer market (if you weren't focusing on that market, to begin with). Overall, these tactics will gradually help your business maintain better cash flow.
In today’s economy, working towards a positive cash flow is definitely one of the top priorities for the coming months in order to preserve your company’s future. Even the most profitable company can become unsustainable if cash flow management is weak, and visibility over cash is limited. Many SME business owners in Singapore require financing for their business, but going for a bank loan can be a bit tedious and intimidating. The tips mentioned above could be used to try and help ensure your cash flow management has been set up for success.
Read also: COVID-19: Smart Towkay's Essential Business Survival Guide for this Pandemic
Read also: COVID-19: How Can Singapore's SME Relief Measures Help Businesses During This Pandemic
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