SMOOTHING THE RIPPLES IN SME CASH FLOWS PART 2 of 2

This commentary originated from the article written during 2017 “Cash flow and credit control: What you need to know” from a UK source https://www.smeinsider.com

Part I of this article discussed the importance and relevance of establishing, maintaining and using a Cash flow system with a couple of simple tables explaining the points made.

Part 2 of this commentary will take a closer look at some of those items that increase / decrease the Cash flow and some solutions.

Generalising, it could be said that Cash Businesses (i.e. those who receive payment in cash / credit cards) can more quickly respond to fluctuating cash positions. Businesses that offer a credit facility may have a longer response period due to the terms of payment and for many SME’s the problems associated with Cash flow are very much connected to the collection of receivables. It is also rare for any Businesses to have a steady, even income stream over a twelve-month period. Almost all will have peaks and troughs that are seasonal and which quickly show a regular annual pattern. This will assist the business when considering the Cash flow for the year. Expenses will vary too of course and may also run parallel with the seasonal trends of the business. However many expenses for a business are “fixed costs” that in ordinary circumstances vary only marginally, such as rent, wages, utility bills.

This article will look at four Cash flow scenarios that impact on the cash position: the Pricing of goods / services, Expenses of the Business, Sales and Collections

The pricing of goods / services

This is an age of high competition, so often driven, it seems, purely by the dollar. If profit margins are set too low, no matter how hard you work it is going to be difficult to make or build a healthy revenue. Build the Business around value for money, service and innovation. Unless your market is targeted to work in the lower end discount space, it is not a good idea to compete. The profit margin needs to be established such that it accommodates all expenses and allows for growth.

It is vital to re visit your profit margins on a regular basis (smaller regular increases are much preferred). Re- establish your market focus and be prepared to lose a few non-profitable customers. Nurture and work on your ‘good ‘customers, thinking of ways to enhance their business relationship with you. Try to do deals with Suppliers for some of your fast selling lines which will improve your profit margin.

Expenses

Expenses have a habit of creeping up on a business and good Cash flow management relies upon a regular scrutiny of the year’s P & L. Keep a close eye on the costs of staff, plant and office expenses. These are all big items. Make sure you don’t stock pile too much through taking up offers of good deals unless they are going to be fast moving stock items; modern equipment is updated rapidly and who doesn’t have a box somewhere that holds out of date fax rolls and printer inks that outlasted the hardware? However, sometimes smaller bits and pieces of expenditure creep in which can add up sufficiently to affect the Cash flow. Never forget how careful you were of spending money when you first went into business, keep some of that meanness!!

Sales

Regular Cash flow negatives could be caused quite simply and transparently by insufficient sales. Some suggested actions to take are to make sure your staff are well trained in the goods / services being provided. Value add a sale by suggesting another related product, e.g.: a waterproof covering for the outdoor furniture, seat covers with the new car. Be pro-active and suggest add on sales that have benefits to the customer. Know your stock / services backwards so that you appear well informed and professional. If you are sitting on dead stock? Think about having a half-price sale, get some cash in.

Plus of course, keep working on new business as today’s customers aren’t probably quite so loyal as they once were, so don’t neglect the importance of promoting the business for new sales. However never forget the importance of looking after your regular customers. They ARE your business

Collection of Receivables.

Some very real problems are created by not collecting accounts receivable and /or letting them drag out for too long. The invoices have gone to your customers, but until they are paid there can be a big dip in the available cash. A thirty-day invoice gets stretched to forty-five, even sixty days and sixty days easily becomes ninety. The bigger the business (including government) it appears, the slower the payment to the SME. Businesses often are reticent to ask for their money, especially if it relates to a good customer in fear of losing that customer.

So what is to be done?

• Firstly have a clear set of credit terms and ensure that these are on every invoice sent out. If you don’t have a credit policy then it is time to create one and send to all customers. Having a policy makes it so much easier when you need to ask for payment as the credit terms can be referred to.
• Secondly try to get some payment from the customer. Even if the invoice is extended, smaller regular payments commit a customer and help your cash. Don’t delay discussing the establishment of a payment plan with your customers.
• Thirdly make it easy for your customers to pay you. Show your bank account details distinctly and prominently for on-line payments; clearly show a mailing address for those who may still send cheques, provide credit card facilities and a physical address if you have customers that pay at your place of business. So often an invoice is so filled with product / pricing details that the where and when to pay can easily be dwarfed.
• Fourthly provide a small incentive for early payment. Discount terms for payment within 28 days has been used for a long time as an inducement, attractive to the customer and affordable by the business.
• Seriously consider using an Invoice Finance (Debtor Finance) facility. Cash advanced against receivables means that you can have and use your money more quickly, instantly improve Cash flow, using it to grow your business
• Lastly, today’s accounting packages make tracking your Receivables very straight forward so ensure that you use and monitor them as a matter of course. It goes without saying that keeping your accounts up to date is imperative,

These discussion items are just some of the situations that affect Cash flow. But you are in business and need to flourish, grow and nurture your business. Good sales, prompt paying customers and an eye to expenses will not always be sufficient to adequately meet your business ambitions. Help IS at hand for the SME. Quicker, smoother and by using your business assets to help fund your growth, your SME Cash financier will help you ease the path to a better Cash flow position PLUS increase and grow your business.

So, continue to love your Cash Flow Spreadsheet!

Researched and written by Jennet Cunnington