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Four Ways SMEs Can Ensure Better Cash Flow
A large number of small businesses, 90 percent by one estimate, go belly up because of poor cash flow management. Here’s how to ensure you don’t succumb to the same problem.
There’s a moment in the Malaysian hit movie Ola Bola when goalkeeper Muthu saves the day by scoring a crucial penalty, and you can’t help but choke up and think, “whether in film or life, hard work pays off.”
Sure that’s true, but running a small business can be trickier than simply putting in long hours. A small business has plenty of challenges, chief among them is ensuring there’s always enough money to pay the bills, your staff, and your suppliers. And that calls for savvy cash flow management.
Managing cash flows well can be tricky. Between the time you first meet a client to the time you get paid, a good three to six months can pass. In the meanwhile, you have to keep the lights on, and your employees paid, and then there are those dreaded unplanned investments.
Here are some helpful tips to ensure you manage your company’s cash flow better.
Celebrate Collections as Much as You Would a Sale
A lot of small businesses focus and celebrate every sale they make. And why shouldn’t they? For a small business, signing up of new customers are moments to pop champagne. It gives your business a shot in the arm, a vote of confidence, and a chance to create a product or service you can then showcase to your next clients.
But in the joy of that moment, don’t forget that getting a job from a client isn’t equal to being paid. Collecting on payments is a crucial part of your business if you want to manage your cash flow well.
The constant follow up with clients for payments can be tough, given the pressure on your time. Fortunately, there are accounting software that can help. The right application will keep sending clients reminders for payments, freeing you up from that tiresome job.
Turn Capex into Opex
One of the biggest nightmares of a small business is large sunk investments that gobble up precious capital and tie it up.
There a number of ways to ensure you aren’t taking hard-won capital (that gets more expensive as the cost of capital increases) and frittering it away on one or two large purchases.
One of the large sunk costs of a business is its IT infrastructure. For a small business the cost of setting up IT infrastructure—including software, servers, networking, storage, and end-point devices—can guzzle up a disproportionate amount of your finances.
Cloud computing and IT leasing eases this problem
You’ve probably already heard of cloud computing. It makes it possible to start up an office and have the IT infrastructure of a much more sophisticated, entrenched player for a fraction of the upfront cost.
With cloud computing you can rent software, server and storage space that would have otherwise cost a bundle if you had bought it outright. Better still, you only pay for what you use.
For IT infrastructure in the office, or end point devices, including PCs, laptops, tablets—all of these can be leased.
The idea of using cloud computing and leasing is especially useful when you have a seasonal business and need to hire staffers on contract for a short while. Investing in IT infrastructure that can meet peak loads puts a strain on a young business’ finances. So, don’t sink capital. Lease or rent, and transform capital costs into operational costs.
Choose the Right Service Provider
A major challenge that small businesses face is unpredictable expenses. Think of office bills like internet and telephone costs, which can suddenly spike. These can give owners of small businesses, such as yourself, sleepless nights because they bite heavily into a company’s finances and throw cash flow off kilter.
Using cloud computing is one way around that. By converting capex costs into opex costs, you can create more predictability around your expenses and flatten out fluctuations in your expenses.
There’s another way to build more predictability into your expenses: Choose your service providers smartly. There are some service providers who understand the problems of small businesses and are geared up to meet their specific needs. They offer packages meant to help business work around unpredictable spikes internet and phone call bills, for instance.
One Malaysian service provider, for instance, has a scheme that offers unlimited calls and SMS for a fixed monthly fee; with no additional charges on data after your quota exceeds.
Prepare for Peaks—and Troughs
Many small businesses tend to offer seasonal products and services. Think of a small hotel owner whose business depends on the tourist season. Or a small manufacturer that specializes in winter wear.
These businesses make plenty of money during one part of the year—and need to set aside money for lean periods. Even if your business does not depend on seasons, it’s advisable to stash away enough cash to cover about six months worth of regular monthly expenses.
One way to deal with peaks, especially from a personnel perspective, is to hire staff on contract. That way you don’t have to pay them throughout the year. But the question is: Do you have to plan for office space based on the peak number of employees? Not really. With the number and maturity of collaboration tools available today, a lot of temporary staffers can work from home.
Managing cash flow is a critical part of your business. Apply these strategies and experience the difference to your business.
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