This is according to Lionel Billings, head of national consulting services at Business Partners.
He says that in the light of National Savings Month, and given the challenging economic environment SMEs currently operate in, it is crucial that business owners know how to manage their cash flow effectively - now more than ever.
Billings says that businesses need to differentiate between profit and cash flow.
“Many businesses are profitable, yet run out of money due to ineffective cash flow management," he said.
"Many businesses generate substantial profit during a month as a result of orders or sales. As payment often isn’t due for another 30 or 60 days, business owners sometimes find themselves in a situation where they do not have sufficient cash flow to continue operating, as they are unable to produce products or pay staff salaries.”
Potential cash flow sticking points:
It is crucial to have strict credit policies in place, as poor credit control can result in not receiving payment on time, which in turn could result in a business defaulting on its obligations.
Also bear in mind that larger enterprises often take longer to process invoices - and late payment can have a drastic effect on SMEs.
If a business doesn’t deliver its products or services on time, the invoice will not be paid. To avoid over-promising to clients, a business needs to have a properly planned workload.
Inefficient ordering systems, poor management accounting, inadequate supplier management and lack of control over gross profits or overheads are other potential cash flow pitfalls.
The essence of successful cash flow management is the regulation of all money flowing in and out of a business.
“An increased, consistent cash flow will create a predictable business pattern, making it easier for a business to plan and budget for future growth,” says Billings.
Tips to increase cash flow:
Stretch out payable
Take the maximum amount of time assigned to pay suppliers, as this will result in interest-free credit for the business.
Take advantage of early payment incentives
If you have cash available, take advantage of the discounts offered by suppliers, as a 2% discount on a 30-day invoice is equal to a 24% annual return if the money was invested.
Also, find out from all your suppliers if they can offer a discount.
Balance your client base
Many service and professional companies, for example accounts, work with certain clients on a project-by-project basis.
Instead, rather try and convert these clients to a retainer relationship by offering some kind of incentive or value-added service. While this may reduce profit margins, it will make cash flow more predictable.
Check your pricing
Review your prices regularly to make sure they are aligned with rising costs.
Ensure that you also monitor your competition on a consistent basis - if they are charging higher prices, then perhaps you should too.
Form a buying cooperative
Do joint buying and buy in bulk with colleagues and/or other businesses to save on your purchases.
Renegotiate insurance and supplier policies
Review insurance policies annually and regularly examine bills to ensure you are getting the best possible deal.
Ensure that you keep a close eye on price sensitive services, such as internet access, as these can often change.
Tighten your stock
Reduce overstocking by calculating your business’ inventory turnover ratio (cost of goods sold divided by the average value of your inventory) and compare this with the industry norm.
Also ensure that you periodically check inventory for old or outdated stock; either defer upcoming orders to use that stock, or sell it at cost to improve liquidity.
Consider leasing instead of buying
Leasing generally costs more than buying, but these costs can often be justified by the cash flow benefits.
Lease payments also have a tax benefit as they can be claimed as a business expense.
Stick to a budget
It goes without saying - don’t overspend.
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