The most common cause of failure for SMEs is the lack of working capital to cover everyday costs of the business. Having enough cash flow to cover your business overheads (salaries, rent etc.) and to pay your suppliers is an essential requirement for a firm to be profitable. However that is not always easy, especially at an early stage where you often incur in unforeseen expenses to grow your business while not having a stable demand yet.
Here are a few tips on how to manage your cash flow efficiently and be able to meet your working capital needs.
Being able to forecast expenses is the key to good cash flow management. If you can predict expenditure early enough, you will have time to save or raise enough money to cover future costs. This all comes down to good budgeting.
A good financial model, will enable you to predict your cash flow with a certain level of accuracy. This accuracy will get better over time, as long as you review your forecasts on a regular basis. Make sure you take into account any relevant risks and dangers, and that you have a clear and reliable understanding of the financial cycles of your business.
An accurate cash flow forecast will allow you to adjust prices and expenses in such a way that your capital needs are always met.
2. Collecting debt
A good place to start to improve your cash flow is considering how long it takes you to collect your debt. Try to minimise the time spent waiting for a payment after your product or service was delivered. Make sure you send out invoices as soon as possible and try to get your clients to pay you within the shortest time.
3. Review your expenses
A frequent review of your business costs can help you spot excessive spend in areas that are not important to the business’ profitability and are therefore negatively impacting your cash flow. It is a common mistake to keep spending money on unused resources because of inconsistent analysis of your expenses. However, this must be avoided at all costs, as it deprives your company of funds that could be invested in a profitable way. A CFO can help you keep costs under control.
4. Negotiate favourable credit terms
On the one hand, in order to avoid bad debts from clients, you should often review their credit terms based on their financial strength and previous history. On the other hand, on the supply side, try to negotiate your payment terms so that you can keep cash in your accounts for as long as possible: staggered or delayed payments are some of your options to achieve that.
Ideally, the credit terms you negotiate with your suppliers should be longer than those of your customers, so that you receive the cash from a sale before you are required to pay your debts. Although this is not always attainable for an SME, it’s the kind of model you should aim for to optimise your cash flow.
5. Invoice finance
Using external companies to finance unpaid invoices can help you unlock working capital that would otherwise be unavailable for an indefinite amount of time. There are two main options that allow you to do this.
– Invoice Factoring involves a financier managing your incoming payments and collecting debts for you while making most of the invoice value (up to 90% usually) available to you upfront. Once the payment has been collected, the financier pays you the remaining amount, minus interest and fees.
– Invoice Discounting involves borrowing money from a financier against your unpaid invoices. In this case, you are still responsible for collecting your.
These options are usually only available to medium-sized B2B companies, but they are a good way of freeing up cash when your clients owe you a great deal.