The importance of cash flow is paramount to companies for all sizes as we often see companies collapse due to their inability to satisfy their cash flow obligations such as salaries, rent and loan repayments. These issues are especially exacerbated when there is an economic downturn.
In this article, we look to provide companies with essential tips to better manage their cash flow in these challenging business environments.
Stay On Top of Your Invoicing
The longer an invoice remains unpaid, the higher likelihood of the company never receiving payment. Once an invoice is issued to a client, SMEs should be proactive in making sure their invoices are settled as soon as possible.
Reducing the time between sending an invoice and receiving payment using online invoicing can make a big difference. Tools like Xero offer invoicing functions and the ability to settle payments online. They also automatically generate recurring invoices to take out of remembering to invoice regular customers.
Other invoice tools such as Chaser are great time savers – they free up time and resources when chasing unpaid invoices as it provides an auto reminder feature with customized templates. Chaser also acts and functions as a credit control system that provides insight to your customer payment history and conversation with you.
Manage Your Business Expenses
Conduct regular reviews of your business expenses with the help of cloud accounting platforms. These platforms can identify expenses that may be cut or alternate actions that can be taken. For example business owners could explore:
- Hire interns, contract workers or freelancers – minimizing fixed salary expenses and allow greater operational flexibility
- Adopt cloud solutions that are free or pay by monthly subscription
- Negotiate longer payment terms with suppliers to ease cash flow burden
- Lower supply costs by purchasing in bulk
- Relocate their office to a lower rental area
- Recycle paper and stationary
- Refinance the loan under a lower interest rate environment
- Create a referral scheme for new business instead of expanding the sales team
- Network more and advertise less to lower marketing costs
- Cut marketing cost and do it in house
- Create a better website and use social media and save printing material costs
- Make use of virtual meeting to minimize traveling time and expenses
Outsource at Lower Cost and For Better Quality
Being able to prioritize what aspects of a company is crucial and what aspects are “nice to have” can make the difference between success and failure. Always compare the cost of doing the work yourself as opposed to a third party as professional service providers can be engaged to outsource back office related tasks as they would usually have better economies of scale than you.
Build a Cash Reserve or Obtain Credit Facility to Raise Capital
A cash reserve can help smooth over any fluctuations in cash flow as a result of seasonality, loss of a major customer or other causes. To build a cash reserve, simply set aside a ratio of your profits, a cash reserve should slowly accumulate. Being able to rely on emergency funds can not only help with cash flow issues, but can also provide a greater sense of safety for business owners as unforeseen circumstances may no longer derail their businesses.
To the extent that a business owner anticipates that they will be short on cash at some point in the future, they may obtain a line of credit at a bank. Doing so can provide a company with the option of borrowing cash when needed. As it is easier to secure a line of credit when a company is healthy, this option can become considerably more difficult to implement when a company is already cash strapped.
When raising cash is absolutely necessary and no other method of financing is an available option, equity financing can be done to raise capital by selling company shares to investors.
Seeking funding is difficult and draining and can take a lengthy amount of time for preparation and negotiation. Equity financing could be an enormous distraction to those who would rather spend their time and energy on building their business.
Monitor Your Cash Flow Regularly by Using Cash Flow Management Tools
Understanding the cash flow of a business is largely dependent on the quality of financial information provided. If financial information is not accurate and not frequently updated, managing cash flow becomes increasingly difficult.
Luckily, cash flow management tools like Xero can help solve these issues and provide transparency regarding the health of your company. Specifically, they:
- Allow companies to manage and share access to their financial documents with their team, accountants and bookkeepers
- Facilitate collaboration, transparency and efficiency
- Provide cash flow reports that show the flow of money going in and out at a glance
- Provide aged receivable and payable reports that explain the reasons behind cash movements
Cash flow management can be a complicated task, but it doesn’t need to be. By using the appropriate cash flow management tools to understand and identify opportunities to improve your company’s cash flow, you will be able to better control the revenue and expenses of your company.
Nick Au works in the Business Development team at the FastLane Group, a Hong Kong-based accounting and advisory firm which has a special focus on helping SMEs. Nick graduated from Syracuse University in the United States with honors and received his Bachelor’s degree in International Relations. Nick joined the FastLane Group in 2019 having previously worked at KPMG as an Assistant Manager in their Mergers and Acquisitions and Deal Advisory team.