This article covers why cash flow management is important for small businesses and also lists seven powerful & effective cash management techniques which you can execute right now.
Cash is considered as the fuel which runs a small business anywhere in the world. Cash in hand is far better and more effective than cash in account books and the bank accounts of borrowers.
Small businesses are always running against time, managing their operations with limited resources and tight budgets. Under these circumstances, if cash flow stops or gets disrupted, then it can jeopardize the entire business, day-to-day operations, salaries, rents and more.
Cash flow management is an important and integral part of running a successful small business. Although it is part of the broader money management theories, implementing the same is tough. During our consulting with MSMEs and small businesses across diversified sectors, we have come across the problem of managing cash flow as one of the biggest problems for the entrepreneur.
Why is Cash Flow Management Important for Small Businesses?
Small businesses cannot run for long with credit and the subsequent interest which gets hammered on them by banks and creditors. Cash is the safest and most optimal way to reduce paying interest on loans and credits.
Suppose the small business owner has cash in hand: They can make future expansion plans, buying new inventory, can plan to spend on marketing and advertisements, hire good employees and take care of his business.
But if cash flow is interrupted, then every plan fails, and they are forced to borrow, and run business operations on credit. This incites the terrible, vicious cycle of interest payment, backlogs in giving salaries, rents, and the whole business suffer. This is why the concept of cash management services is picking up, but not every small business can afford one. Especially when they have less cash in hand (ironic!)
We have consulted with our cash management experts, financial experts, and small business veterans to come up with seven powerful and effective cash management techniques for small businesses, which you can execute right now.
7 Cash Management Strategies for Small Businesses
1. Finance Your Expensive Purchases to Save Cash
Small businesses and SMEs can always finance their expensive purchases, and rather than paying a lump sum amount, pay in installments. For manufacturing enterprises, for example, Govt has launched several credit facilities for machinery and equipment which can be availed. Govt also has several schemes for tech up-gradation, wherein a major portion is subsidized. There are financial companies that are ready to finance such expensive purchases for machines, equipment and technology.
The cash in hand, thus saved, can be used for paying salaries, rents, and business expansion.
2. Sell or Lease Equipment, Real Estate Not in Use
Machines, equipment, and real estate are not in use currently, and in the idle state can be sold or rented out to raise quick cash and run the operations. Thorough research is required into this, since asset management and rental is big business in itself, and lots of companies are renting machines, equipment, rather than buying it.
But make sure that your regular business operations are not impacted due to this.
Parking this extra cash you get from leasing/selling idle assets can be parked in a Liquid Fund, so that you can continue to earn interest, and can withdraw when needed.
3. Negotiate Your Payments with Vendors, Suppliers
In case of severe cash flow issues, small businesses can negotiate with their vendors, suppliers and delay the payments, if necessary. It may happen that the vendor doesn’t require immediate payment right now, and can accommodate your pending payments. Or your supplier owes you a favor in the past, and will readily agree.
You will need to dig out past relationships and ask for a favor in such cases.
The entrepreneur has to adapt, mold and adjust, and this is no different.
4. Expedite Recovery of Receivables
In case of cash flow disruption, the #1 rule is: Bill fast, and collect fast. If you need to change or alter your invoice cycle for some of the customers, do it. If a customer is not paying the past dues, take a follow-up, and demand the payment.
After all, it’s your cash that is held up, and it’s your business that needs to survive.
Make a list of all past dues, receivables, and start the process of the collection as soon as possible.
5. Demand an Advance for Large Orders
If your small enterprise has received a big order, then demand an advance or deposit, and then make a payment schedule based on the deliveries.
For example, if a small digital marketing agency has received a big order of an eCommerce website, then there is no harm in asking for an advance, since the work is long term, and you need good, creative people to execute the same. Milestone-based payments are also a good option if the client is ready to pay as per the delivery of services.
6. Reduce Expenses
If possible, small businesses should resort to reducing their expenses, to save cash, and improve cash flow. The survival of the business is paramount, and if expenses are going overboard, reducing expenses becomes a necessity.
For example, you can select a co-working space for your team, instead of renting a full floor, which consumes 20% of your profits every month.
Or implement work from home for those employees, whose physical presence is not needed, and thus save on travel allowances, electricity, office occupancy expenses.
Some financial planners also suggest having cash management accounts, for different businesses, in order to monitor cash transactions in a systematic way. With such an account, you will be aware of how and where to reduce expenses, and when.
7. Increase Margins
At the end of the day, the business has to survive. There is no point in doing business with low margins if it’s not able to sustain itself. To improve cash flow and to ensure that the operations are running, a small business can also consider increasing margins on their products and services, and thus, ensuring more profits.
Of course, it’s a risky move and can upset a set of clientele, but it can also act as a filter: The clients and customers who value your work will stick on, and support, and the rest will leave.
Entrepreneurs need to take hard decisions for their business; raising margins for improving cash flow is one of them.
Need more help with a cash management system for your small business?
MSMEx experts are here to help you. MSMEx is a unique platform that provides you mentoring services from some of the sharpest minds in the business and corporate world. Get the best cash management advice and consultation now!
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