Having worked with small to medium-sized enterprises (SMEs) for over 15 years, I have been privileged to provide advice to clients in almost every industry including retail, education, construction, e-commerce, ICT, mining, FinTech, MedTech, Healthcare, Tourism, and even hospitality. By working with all kinds of SMEs, ranging from sole traders to multi-site operations, I have unfortunately witnessed a lot of business failures.
There have been various reasons for this including trading losses, the (unfortunate) COVID-19 pandemic, inadequate training, lack of business- and financial skills, and lack of capital. However, most business failures have nearly always come down to one thing, poor cash flow. The worst part has been, in most cases, the business owners weren’t even aware of the cash shortages until it was too late. This is because they had a very profitable business (at least on their Profit and Loss Statement) but with liquidity problems.
As we approach 2021, here’s my 12 Tips to Avoid Failure in Small Business Cash Flow Management:
1. Figure out Your Breakeven Point
Any good business owner should know when their business will become profitable. This will not necessarily affect cash flow, but it will give an early goal to strive for and a target needed for projecting future cash flow. Negative cash flow and negative profits make for a depressing combination, that is why knowing your breakeven point is so important. Focus your efforts on managing your cash flow with an eye toward reaching your profit goals.
2. Company Line of Credit
A successful protection strategy against cash flow concerns is a company line of credit. If you use them as leverage, you will be eligible to get a line of credit with a portion of the accounts receivable or inventory. Look into Trade Financing and Factoring as possible funding solutions.
3. Updated Account System
To manage cash flow, you must have an accounting system in place that is kept current, meaning data is processed frequently to be able to determine accounts payable aging, accounts receivable aging, liabilities, and actual cash in hand. Reviewing these balances regularly can help you in determining your business cash flow, trends, and opportunities.
4. Reconsider Annual Subscription Services
Evaluate any subscription services you have annually (if not more frequently). You may have services providing duplicate features or even providing a service you don’t need any longer. Put a block on your calendar and go over the bank statement to see what’s been paid for and make sure it’s something you still need. You don’t need to subscribe to every article, every newsfeed, and every magazine.
5. Stay on Top of Your Invoices
There are some great small tips out there that can help you manage your cash flow more successfully. Firstly, you need to be monitoring your cash flow regularly, and this can be a way that suits you. As long as there is a system in place that people can understand, that is all that matters. You can also help your cash flow to be more responsible by cutting costs where things are unnecessary. Staying on top of invoices can also be beneficial. Nothing should stop your invoicing, regardless of if you need to travel or conduct other business at the same time.
6. Assess Risks Often
Assessing your situation often is a must! You must constantly be asking yourself if you, as a business, can financially manage to make a certain payment without any risks. If there is no risk, you should try your best to be paying in advance as much as possible. If there are any risks, even if they are minimal, you should assess whether or not you are financially capable of taking the payment on. Making sure you can pay everything off either on time or early can ensure that you will see your profits rather than waving them goodbye when you have things to pay off.
7. Track and Analyse Everything
My best tip on managing cash flow is to track and analyse everything. Oftentimes, you’ll discover that you may not need a certain tool or expense. Or, instead of hiring another employee, you might be able to automate a process or hire a when-needed Freelancer. The most important thing is to keep asking yourself the hard questions about any major purchase.
8. Improve Your Cash Flow
What exactly is cash flow? It is the movement of funds in and out of your company’s bank account. Ultimately, cash flow is the lifeline of any small business. A profitable company on paper could end up bankrupt because the cash coming in didn’t compare with the cash going out. Companies that don’t execute strategies related to maintaining good cash flow could land their business in hot water down the road. While all businesses may ebb and flow in their own way, there are several ways to better manage consistent cash flow as a small business owner.
9. Charge Customers on a Subscription-Based Method
Many small businesses start out with transactional or one-off solutions. Look for ways to provide subscription-based solutions to your customers. This provides you a steady, monthly recurring revenue stream that can help you manage your cash flow better.
10. Set Your Price and Fees Appropriately
First off, be careful in setting your pricing/fees. If you offer a service that your competitors do not, don’t hesitate to price your services at a premium. Second, use digital invoicing with online credit card payment to assure quick payment. The slight loss to a credit card fee is more than offset by quicker collection.
11. Trust a Financial Expert
As a graduate in Investment- and Financial Strategy, there’s nothing I would rather do than jump into some spreadsheets and analyse the businesses of my clients and make the decisions for them. But as a business owner, delegating this responsibility to a bookkeeper/accountant is absolutely necessary. Not only does the decision to delegate free up time, but a financial expert can introduce new perspectives that you wouldn’t have otherwise as a owner. Do yourself a favour and hire a bookkeeper on an hourly basis to do most of the heavy lifting. Then, as an executive, get the summary and make the right decisions.
12. Establish a Protocol When Cash Flow Drops
Sometimes, small business owners experience tremendous discrepancies in their expected cash projections with actual cash flows. When this happens, many find it difficult to budget their finances because they failed to consider this scenario. Smart business owners anticipate bad situations and cash flow drops are one of them. One way to address cash flow drops is to invest in a cash flow management tool. A cash flow management tool makes it easier for business owners to track all incoming and outflowing cash flow. Doing so makes it easier to make intelligent budget decisions with a reliable tool that tracks finances.