Top 5 Cash Flow Management Tips for SMEs
It’s important to understand that cash isn’t a representation of a business’ value, but it is essential for operating a business. For small to medium sized businesses, not maintaining control of cash flow can be one of, if not the most critical component as to whether a business fails or thrives. Poor cash flow management can rapidly impact the operation of a business, creating severe issues like not having the ability to purchase new inventory, paying back loans, or even worse, not being able to pay employee wages.
As we have outlined in a previous article – Late payments creates cash flow stress on Australian small business, small businesses in Australia are currently at a severe disadvantage with respect to larger companies – adding significant pressure on operators to remain in business, let alone be profitable. This disadvantage is known as the ‘cash flow gap’. It’s where the large amount of money owned to SMEs from large companies that is sitting between worked done & invoiced, to actually being paid.
It is a sad fact that the smaller the company, the longer it might be for their invoices to be paid, while larger corporations invoices are usually settled within payment terms. As the majority of smaller businesses need to adapt to the strict terms enforced by the larger organisations to maintain business, we have decided to outline our top 5 cash flow management tips to help small business manage their cash flow and improve their current financial position.
Here are some of the best cash flow management tips for SMEs:
1. Budgeting vs Cash Flow Forecast
Most businesses will create some form of budget (and if you aren’t, you really should be). It is advisable that alongside the budget you produce a cash flow forecast. The way a money flows through the business does not necessarily reflect operations. For example, your expenditure happens in month one, you make the sales and must pay your creditors in month two, but your debtors do not pay you until month three. Producing a cash flow forecast enables you to anticipate peaks and troughs, enabling you to plan purchases and production.
2. Know your customer
There are ways to check the viability of your customers before you enter into a contract to sell or provide services. Obviously this is limited, but you can tailor your payment terms to your needs and to suit individual customers. There is no requirement that each debtor has to have the same credit terms. Establishing clear payment terms is a cornerstone of good cash flow management.
3. Have a clear credit control process
Even if you don’t have a large credit control department, you should have a formalised credit control process. There should be a clear process to manage bad debt at different steps. At the very minimum, each contact with a customer about a debt should be documented so you can see which stage the debt process has reached. It is preferable however to document the stages and the actions to be taken at each stage. If you don’t already have a clear process in place, you may like to read our article Debt Collection Guidelines in Australia to familiarise yourself with the process as it’s important to understand your rights and responsibilities with regards to consumer protection laws in Australia.
4. Incentivise payments
If a consistent inflow of operating cash is vital to the business’s growth and survival, you may want to incentivise your debtors with early settlement discounts. This is where the customer receives their goods at a reduced price for early payments, minimising the chances of slow payers or bad debt, whilst maintaining a steady level of cash flow to support day to day business operations.
5. Outsource to Professionals
Although it is easy to automate much of your cash flow management, it still requires resources to chase debtors, even if outstanding invoice notifications are produced automatically using accounting software. Depending on the amount or frequency of your bad debt, you may want to consider outsourcing your debt collection to a specialist debt recovery agency. Like every commercial business decision, the return on investment needs to be examined, although the main question you need to ask yourself is whether you are more valuable running your business or chasing payments from slow paying customers.
Even if you outsource a component of your debt collection activities, it is advisable to regularly update your cash flow forecast, keep up to date with market conditions, and keep an eye on persistent bad payers to try and limit reoccurrence.
About Marshall Freeman
Marshall Freeman is Australia’s leading debt collection company, with over 15 years’ experience servicing over 20,000+ clients across Australia and New Zealand. Being dynamic leaders within the industry, our reputation is built on ethical, compliant and results driven debt recovery by making sure your debt is a priority to get paid faster.
If you would like to speak to us about debt collection or how we can improve your businesses cash flow, please enquire today or call 1300 136 271 if you would like to speak to a collection specialist now!