4 Tips to Ease Cashflow for SMEs
For any SME having a healthy cash flow is vital for growth. But even if your business has a sales’ ledger to be proud of it doesn’t always follow that you’ve got cash to hand. And this can quickly cause your SME to grind to a halt. So here are four simple tips that can help you ease cash flow and allow your business to continue to grow to its full potential.
1: Invoice Financing
This is a great way to access credit against the value of your sales’ ledger. If you are short on cash because stock is going out but you’re waiting for payments to come in then it’s a viable solution for you.
Financing comes in two forms – invoice factoring and invoice discounting. Factoring allows you to sell your invoices onto a third party (for up to 90%) of their value. You can then draw credit on these invoices and leave the debt collection to someone else. Invoice discounting allows you to take out loans on your sales’ ledger, while you still keep control of the invoices and debt collection.
Both invoice factoring and invoice discounting save money on overdraft or loan interest. Factoring also saves money on wages as you don’t have to employ someone to chase debts. However, discounting is an option for companies who don’t want a third party to collect for them because they wish to maintain a personal touch in their customer relationships.
Invoice financing is also a good alternative if you struggle to secure a bank loan at a fair interest rate. It allows you more control over your cash and this provides opportunity to grow as a business.
2: Invoice Correctly
A healthy cash flow can dry up due to mistakes in invoicing. One small error and at the end of the payment period a customer may demand a new invoice. And so you have to wait another 30 days for the cash. It is vital to have a system that ensures all invoices are correct the first time they go out. Secondary to this you should always have a good follow-up process in place. If the cost of setting up and manning this is a strain on your business then using an invoice factoring firm could be the next step to take.
3: Negotiate Your Payments
Just as late payments can cause you cash flow problems, delaying your own payment of invoices can ease cash flow. So always wait as long as possible to pay any invoices due. And try to negotiate with your seller. A standard 30 day payment term can often be extended to 60 days. If you don’t ask, you don’t get.
4: Cash Flow Projections
Always carry out a cash flow projections at least two quarters in advance. This means you should be able to foresee any shortfalls on the horizon. This is particularly relevant if your business has a seasonal ebb and flow. Banks are wary of businesses that need cash in a hurry so good projections allow you to plan loans in advance. You can often get a better deal if you are in a strong cash position but if you are finding it hard to negotiate a bank loan then invoice financing is often a more financially viable alternative.
About the Author: David Summers is the Invoice Finance Product Manager for SimplyBusiness.co.uk who offer a range of finance and insurance products for UK SMEs.
Photo Credit: AJU_photography
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Managing Your Cash
Below is the final article in our $150 competition sponsored by BizSugar.com. It’s submitted by Cathy Iconis, who provides Virtual CFO & Consulting services. Good luck to everyone who contributed an article!
We all know that cash is critical to running a business, no matter the size. But as small businesses, we generally have less cash than the big guys, so we need to know how best to manage it. The first step is to better understand how much cash you have and how you are using it.
First, I want you to know that just because you have profit at the end of the day/month/year, that doesn’t mean you have more cash. The Income Statement (or Profit & Loss) is a tricky thing. It shows you how much revenue you have for the period and the costs related to just those revenues. It might not include cash spent on a large investment, money you received from an investor, or even disbursements you’ve made to yourself as the owner.
The best way to understand how much cash you have and how you are using it is to look at your Cash Flow Statement. It is a simple report giving a ton of information in these four parts:
- Operating Activities: How much cash you have at the end of the period from your daily operations
- Investing Activities: Cash outflows from purchasing a new asset or making loans to vendors or customers
- Financing Activities: Includes cash you have received from banks or owners or cash you’ve taken out of the business
- Cash at End of Period: How much money you have at the end of the day, net of the above
The Cash Flow Statement is fairly easy to get your hands on. Even businesses running on QuickBooks can run a quick Cash Flow Statement from their Reports menu. You can also ask your accountant to supply you with one when they review your books.
Now that you know how much cash you have and where it is going, spend some time thinking about the best uses for your cash. If you are eating up all of your cash from daily operations, then you aren’t able to invest in assets that could potentially help grow your business, like an additional server to give you added capacity so you can have more customers. Here are some ways to manage your cash:
- Budgets: Budgets can save you money and time! In a few hours, you can create a simple budget. Just look at what you spent last year and adjust any items that you don’t expect in the future. Enter your budget in your accounting system. Then run a report to see if you are on track. Easy as pie!
- Dashboards: These are just graphs, charts, or some other visual representation of your financial data. We all know it is far easier to “see” your company when you are looking at a picture. You can visually compare your data: you can see how you are doing versus last month, see what you are spending the most on, or even see which customer is giving you the most money.
All in all, it is important for you to manage your cash. This means understanding how much you have, where you are using it, and how to track it. I challenge you to move past going from hand to mouth and start managing your cash so you can grow your business!
If you have any questions or want to learn more about how you can better manage your cash, visit my website, www.CathyIconis.com.
