OVERVIEW
Cash is oxygen for every organisation and no business can survive without cash in hand. Business expansion and growth are also impossible without a positive free cash flow. Even businesses with very high profitability can close down in absence of liquid cash. MSMEs and Startups suffer the most as they have limited access to finance and in the event of any stoppages in cash flow, the business operations are likely to come to a standstill forcing them to wound up their business either temporarily or permanently.
As any disruption in cash flow can seriously jeopardize the entire chain of business operations ranging from raw materials procurement to salary payment, Cash flow management becomes a matter of tremendous significance for businesses especially the smaller ones.
Cash flow management is a subset of finance and money management and effective implementation could be a serious issue for small businesses with limited professional skills and expertise. Several surveys conducted on MSMEs and Startups revealed that managing cash flow is the biggest of all challenges faced by small businesses during the business life cycle.
WHAT ARE THE REASONS FOR CASH FLOW CHALLENGES IN SMALL BUSINESSES?
Cash flow needs to be managed very prudently by small business owners and strict discipline must be maintained in terms of cash flow forecasting and budgeting. The main reasons for cash flow issues can be attributed to the following
- Unfavourable Payment Terms with Customers and Suppliers can adversely affect the cash flow, early disbursement of payment than that realized can dry up cash flow
- High Inventory especially for manufacturing MSMEs and Startups can block a considerable amount of cash
- High Fixed Costs in the form of debt & interest payment, high rent, high salary etc. can adversely affect the cash flow
- Unnecessary Expenses on non-value-added activities can cause reduced liquidity e.g., marketing expenses that can’t generate leads and grow customer base
- Seasonal effects as financial year-end time can be challenging for cash realization
WHAT ARE THE STRATEGIES FOR AN EFFECTIVE CASH FLOW MANAGEMENT OF MSMEs AND STARTUPS?
Following are the Roadmaps of MSMEs and Startups for an effective cash flow management system.
1. Planning and Forecasting Cash Flow
Cash flow planning and forecasting can lead to better management of working capital, reduced debt and high-interest cost and better evaluation of revenue requirements for handling expenses.
2. Financing of Expensive Purchases
Easy financing is available these days that can be used for expensive purchases and help avoid blocking of a large amount of funds. Instead of paying a lump sum, payment can be made instalments. Governments have also launched many credit facilities to finance capital expenditures of MSMEs and Startups.
3. Utilising Idle Assets and Outsourcing Machinery
MSMEs and Startups with assets e.g., land and machinery not being used for business purposes can rent out or sell such assets for mobilizing cash and address short term cash flow issues at hand. Many small businesses prefer to procure machinery on rent rather than spending on Capex for preserving cash and ensuring business sustainability. The cash generated from rent or sale can be put in a short term investment fund that can earn better interest than a fixed deposit and still be liquid.
4. Negotiating Payment Terms
Based on cash flow forecasting, MSMEs and startups can negotiate with their suppliers for temporarily delayed payments to address cash flow challenges. In many cases, vendors realize the situation and agree on deferring the payments. Similar arrangements can be made with the customers to speed up the realization of funds. Relationship management plays a big role and a lot of effort must go into this.
5. Expediting Recovery of Receivables
Sending invoices immediately after delivery of services and products needs to be the guiding policy of all SMEs and Startups. Fast billing and fast collection of receivables are a must for effectively address the cash flow. Tracking of receivables with continuous follow up on past dues is also extremely critical in ensuring liquidity and optimizing Days Sales Outstanding (DSO). DSO of 30 days or less with a Collection Effectiveness Index (CEI) of more than 80% is generally recommended for small businesses for healthy cash flow.
6. Claiming Advance from Customers
For executing big orders, MSMEs and Startups must negotiate on advance deposits and payments on part deliveries with their customers.
7. Reducing Unnecessary Expenses
Identifying and reducing unnecessary expenses should also be on the agenda of small businesses to effectively address cash flow challenges. They should continuously strive to reduce expenses, save cash, and make regular cash deposits to bank accounts for improving cash flow.
The fixed costs associated with your business must be reviewed critically and periodically to identify opportunities for cost reductions e.g., cosharing of office spaces, online marketing avenues for lead generations etc.
8. Negotiating Price
Though risky and non-viable at times, increasing the price of products and services can help small businesses garner more revenue. Similarly, price negotiations with suppliers can be initiated with strategies planned for a win-win situation. Implementing cost management and cost reduction incentives can also work well and can automatically translate into improved margins without entering into risky price increase with the customers.
9. Reducing Inventory
Reduced inventory can drastically improve liquidity within a system by unlocking a great deal of money. Reduced inventory also helps in reducing wastages and operating cost of the business. For manufacturing MSMEs and Startups, Just In Time (JIT) inventory management system has been hugely successful all over the world.
10. Technology
Last but not least, present-day technologies can help MSMEs and Startups to solve their cash flow puzzle to a great extent. Expense report software for expense management automation and credit card reconciliation. Time tracking software for optimizing staff, Inventory monitoring software for optimized inventory, online payment for speeding up receivables processing, automatic expense monitoring, etc., can help manage cash flow better.
Takeaway
More than 60% of small businesses fail to see the day of light due to imprudent working capital handling and poor cash flow management. In simple terms, delaying cash outlays as long as possible and collecting cash from customers as quickly as possible guarantee an efficient cash flow management system.
