Staying on top of your cash flow is key to business survival and success - and it doesn't have to be daunting.
Just as how blood pumps through the human body to keep it alive, a healthy cash flow is critical for a business’s survival.
In fact, small businesses often fail because they run out of cash, not because they stop making profits. And as COVID-19 has shown, things can turn very quickly from good to bad.
In a March 2020 survey by the Association of Certified Chartered Accountants of Singapore, 37 per cent of 115 respondents said they were having cash flow problems as a result of COVID-19. The figure rose to just under 50 per cent three months later in June.
This makes good cash flow discipline even more essential to surviving through the uncertainty. How? Here are five tips to get going:
1. Know the difference between cash and profit
You closed your accounts with a profit, but have no cash - how did that happen?
For one thing, profit is not the same as cash. You may already have the dollars reflected as current assets under accounts receivable. But if you are unable to collect what is owed, you will not have cash to pay other bills.
Profit, by itself, does not pay the bills. Hence, it is important to understand the difference and relationship between the two metrics. The key difference lies in account receivables, that is, collecting payments owed by your buyers or customers.
Review your credit terms and collection discipline. Ask yourself: Are you too generous with your credit terms? Do you have a collection system, platform or resource to ensure that customers pay within a set of stipulated dates? Do this well to manage your cash flow.
2. Maintain a good relationship with suppliers, clients and banks
Managing the relationships between your suppliers and clients as well as keeping a tight rein on their respective credit terms are pivotal to the success or failure of a business.
Funding gaps can be fulfilled by banks via working capital loans. Be active in seeking working capital facilities from more than one bank. Always seek working capital even when you do not need it urgently and the company’s prevailing liquidity is at a healthy level. When a company’s liquidity is down and the situation is not in your favour, banks may turn risk-adverse too.
3. Control your inventory
Trade businesses that rely heavily on stockpiling goods might have to take a relook at their inventory management practices. This is because over-stockpiling locks in your cash.
4. Build up a cash buffer
Like a lifebuoy, cash reserves give companies the confidence of meeting short-term and emergency funding needs before they turn to a bank’s credit facilities. Cash reserves are akin to insurance policies that will help you tide through times of economic uncertainty like COVID-19. They also serve as a financial buffer for other unexpected or unplanned expenses or funding requirements.
A healthy buffer would be holding cash that is equivalent to three to six months of your usual company expenses. You can start by making projections of your cash flow and the burn rate of your expenses. This is especially critical for businesses with fluctuating revenue streams.
5. Keep an eye on your cash flow position regularly
A company’s cash position is like a health report - it reflects your company’s level of cash relative to its expenses and liabilities. Your cash position should include available and unused credit lines. Be on top of it or assign someone to watch it closely. You may need to keep track of cash flow on a weekly, maybe even a daily basis - depending on the nature of your business.
Also, do not be afraid to tap on technology. Without dedicated in-house finance functions, managing the cash flow and numbers can be an onerous task for many smaller SMEs. This is where having a trusty online banking platform comes in.
For instance, Maybank Business Internet Banking (BIB) provides payment capabilities from PayNow to payroll service under Automated Payment System Plus (APS+). This helps businesses manage their day-to-day finances on the go, gaining better control and insights into their cash flows and ensuring that their business continues to run healthily.