Every SME knows what it's like when invoices are all out, but there's still no payment on the way... You’ve brought business in, you've worked hard, and you've got every expectation that you will be able to pay the bills. The problem is that often your customers will pass on their cash flow problems to you.
If you are suffering from this sort of negative cash flow contagion, then your SME has a cash flow problem. Self inflicted or not, you’ve got to take action. Why? Because poor cash flow management causes more businesses to fail than ever before.
To help your business avoid cash flow problems, we will take a look at some ready remedies and clever fail-safes to prevent cash flow problems and allow you to take control of your business.
1. Timing is Everything
Quite literally, well run and profitable businesses get into difficulty because there is more cash going out before enough cash comes to pay the bills.
Seasonal businesses are a prime example. Underestimating annual bill hikes another. Plan ahead of expected busy periods. Avoid majorly overlapping client contracts, and run them in lean consecutive order of one another, within reason. If you need to take on temporary extra staff or hire machinery to fulfil contracts on time, then have a working capital loan assured or in progress from your downtime. The embarrassment of riches come payment time will be less if you don't have to explain delays to your suppliers.
2. Careful Purchasing
Be mindful of purchasing strategy that enables you to purchase the same goods and materials at lower prices. If you have good cash flow you can buy in bulk. If you don't, you will live from dinner table to crust. Many materials will cost you less the more units you buy at once. Then again, if bulk materials storage is costing you more than purchasing on a needs must basis, then take that into account too. Be agile in your purchasing and watch for annual trends. Being prepared for fluctuations in price or wage costs are often the biggest logistics concerns for SMEs. If you don't have the expertise, hire a consultant to do the purchase strategy forecasts for you.
3. Tactical Cash Flow
Aside from monitoring your cash flow with overheads and materials in mind, see if there is leeway and wriggle room on your receivables. Offer discounts to customers who pay bills on time. Require credit checks on all new non-cash payment customers, issue invoices promptly and follow up immediately if payments lag. If your SME allows it, try to get cash deposits as orders are made.
4. Plan Everything
You might have time to spend days putting together a business case or developing complex cash flow projections, but many SME owners don't. When a cash flow blockage arises, some companies may develop short-sighted measures to stay afloat such as liquidating assets, or delaying payment to vendors. Cash flow problems often require quick solutions, but they shouldn’t.
Understand when money will be spent, and on what. Have a line item on your projections for every significant outlay, including: rent, cash inventory, salaries and wages, sales and other taxes withheld or payable. Remember to account for benefits paid, maintenance of equipment purchased, professional fees, utilities, office supplies, debt payments, advertising, vehicle and equipment maintenance, fuel, and cash dividends. In short, keep an eye on everything that impacts on cash flow.
5. Expect Delays
Start to think in terms of putting regular working capital loans in place. Some SME business owners, such as restaurant owners and construction companies, see working capital loans as a part of their regular cash flow structure, for example when taking on larger contracts or refurbishment.
Others think of annual working capital loans as part of their stocking loan cycle requirements, or revenue bills payment until the January flush, or indeed as preparation for the unexpected, such as redundancies or insurance premium hikes.
Remember, banks take on average up to 13 weeks for SME loan drawdown, and that does not include the months and effort put in before receiving a positive decision. In reality traditional sources of credit can take too long.
If you discover that you will need access to additional capital in order to keep your cash flow healthy, the good news is, you've got more options than ever before.
At Linked Finance, we cater for businesses that need solutions to short term or annual flows, fast. Give us a call or apply online now...