Here is how SMEs can overcome cash-flow hurdles in turbulent times

Cash-flow issues can derail business, SME owners should always have a plan in place. (Image: Unsplash)

One of the biggest challenges for small and medium enterprises (SMEs) in the growth stages is managing cash flow. There is a multitude of problems, which can have a significant impact on operations and growth.

Typical cash flow issues include the following:

Late payments: When customers take longer than expected to pay, it can create a cash flow crunch for the SME.

High operating costs: SMEs may have high operating costs such as rent, inventory and payroll, which can put a strain on cash flow.

Seasonal fluctuations: Some businesses can experience seasonal fluctuations, which can affect the cash flow.

Limited access to credit: SMEs may have limited access to credit, which can make it difficult to manage cash flow during slow periods.

Lack of working capital: SMEs can struggle to generate enough working capital to cover day-to-day expenses such as inventory and payroll.

Absence of proper forecasting: If an SME lacks proper forecasting tools or techniques, it may miss out on important cash flow projections and find itself in a financial crisis.

Unforeseen expenses: SMEs may not have sufficient reserves to cover unexpected expenses such as equipment breakdowns or legal settlements.

Cash flow hassles can be damaging for SMEs because they often have fewer resources and less flexibility than larger businesses. It is important for SMEs to have a good understanding of their cash flow and to develop strategies to improve it.

Here are some instances of SMEs facing cash-flow issues:

A retail store has a slow period during a year, as sales plunge. This causes a cash-flow problem because the store still has to pay bills and employees, even though it is not generating much income.

An SME in the construction industry has a large project that takes longer than expected to complete. The company has to pay employees and suppliers while waiting for payment from the client.

A small restaurant sees a demand spike during the holiday season but doesn’t have enough capital to purchase the additional inventory. The restaurant misses out on sales opportunities.

A service company in the commercial cleaning business has a client who is always late in making payments, which delays the funds it needs to pay its bills and employees.

A small manufacturer needs a machine to be fixed immediately but doesn't have enough cash at hand to cover the costs. Production will come to a standstill if the machine is not fixed.

A technology company has a product launch that requires significant investment in R&D but the expected revenue is not coming in as expected. This cash flow glitch results in a major downturn for their growth plans.

These are just a few examples but cash flow issues can pop up anytime and stem from a range of causes.

SME leaders need to find ways before cash flow situations come in the way of their growth. A list of suggestions that can better cash flow management:

1 Invoice as soon as the work is done: Send invoices to customers as soon as goods or services are delivered, and follow up on pending payments without delays. Sales folks should be taught that a sale is not completed without realising payments.

2 Negotiate better payment terms: SME owners must work out mutually beneficial payment terms with suppliers and customers, such as offering discounts for early payment. Once a cash-flow issue occurs, invariably SMEs will delay supplier payments and then it will spiral into a bigger problem of production.

3 Monitor expenses: Keep track of expenses and look for ways to reduce them. Lean management is always preferable at all times. Renegotiate better deals with suppliers or cut down unnecessary costs for immediate results.

4 Improve collections: Implement processes to improve collections by offering online payments or setting up automatic reminders for overdue invoices, etc. Sales folks should also be trained to politely get the collections managed.

5 Grow revenues: Focus on increasing sales either by finding new customers or selling more to existing ones.

6 Cash-flow forecasting: Make use of tools and techniques to forecast the cash flow. This can help in anticipating future needs and preparing well in advance.

7 Find alternate financing: Look into financing options, such as business loans or lines of credit to manage cash flow during slow periods. Factoring is a good option to manage receivables.

8 Consult a financial adviser: If you do not have a consultant, find one to address your business needs.