Businesses, especially SMEs, have grown highly competitive in the past 10 years. Local competition is not new, but international and online competition have kept small businesses on their toes. And along with the general cost of living, cost of doing business has gone up as well. In such a scenario, it is absolutely essential for SME owners to keep an eye on their cash flow. Most start-ups fail in the initial stage because of cash flow issues in the business.
Getting in the driver’s seat
Ask yourselves these 2 questions to ascertain if your SME’s cash flow is in good health.
- What is my current cash flow?
- What is my expected cash flow in about 6 months?
If you don’t have the answers to these, brace yourselves for a tough ride. Avoid this scenario by inspecting your cash flow at least once a month. This will also help you forecast your future statements better, as your business prepares to expand.
These tips can help you get a good grip on the cash flow of your SME:
Cash is the king, not profit
A lot of SMEs in Malaysia don’t have a cash flow plan or effective cash management practices from the first day of business. In spite of being profitable, these businesses can fail because they need good cash flow to survive.
If your cash flow is healthy, profit will follow. During the initial stage of your business, focus on reliable clients, even if it means smaller margins.
Technology to the rescue
FinTech can be used to make managing cash flow much easier. Cloud computing removes the hassle of backing up your accounting statements, while giving you the flexibility of looking at these statements from wherever you want. Other accountancy software also help SME owners to focus on administration.
The collection and processing of receivables can become the biggest headache for SMEs, but there are practical ways to get around it. Ask clients to sign preauthorized or certified cheques, so that payments can be drawn against their account at periodic intervals. Also, centralize your banking operations with one bank. An age old method is to offer discounts on receiving payments in cash instead of credit.
Only provide credit to reliable clients
Extending credit to clients and customers is an essential part of business, particularly SMEs when they are growing. But it is necessary to determine the profile and risk of each customer before extending credit. Can they make payments on time? Is their business spreading or stumbling? In fact, is their own cash flow strong? To verify these, you can check their credit scores or their references.
Another option is to accept credit cards; this may result in a small percentage cost of the sale, but it is a safer bet in the long run.
This should be your basic principle – invoice clients as soon as possible. If you invoice the work 10 days after it has been completed, the cash will likely take 10 days to arrive in bank as well. Issue the invoice over e-mail for roof and speed.
Manage cash flow well, and be on top of finances always.
A version of this blog post was also uploaded to the website of our sister company, Funding Societies (Singapore), here.
This article was written by Funding Societies, the first peer-to-peer (P2P) financing platform in Malaysia. We provide working capital financing for small and medium-sized enterprises (SMEs); we also offer investment opportunities with returns up to 14% per year. To learn more about us, click on our website here. You can also see our up-to-date progress and statistics in Southeast Asia here.