Cash flow management - 2 low hanging fruits for SMEs

Managing cash flow has been identified as a top business priority by 56% of the 724 Owners, CEO’s, MD’s and Directors of different South African Small and medium-sized enterprises interviewed during a recent survey conducted by IPSOS to understand the impact of Covid-19.

Many SMEs are experiencing negative cash flow as a result of the impact the pandemic is having on the economy, that means you have more cash leaving your business—whether that’s through salaries, rent payments, marketing, and other fixed or variable costs—than you have coming in.

What is cash flow management?

Cash flow management is the process of tracking how much money is coming into and going out of your business. The process of monitoring and optimising the timing of various cash flows in your business is very important. Positive cash flow is more money coming into the business than going out and negative cash flow is less money coming in than what the business needs to cover expenses.

It goes without saying, that your business needs to manage top line sales to have positive cash flow.

Revenue generation is always a primary focus for any business, and cash flow management is one of the tools that you can use as a business owner and manager to improve the business’ ability to operate in the green during these unprecedented times.

We advise our clients on several tools to manage cash flow as these ‘low hanging fruits’ will assist any SME to improve cash flow. We have listed two of our tools in this article:

1. Reduce financing cost

The easiest way to lower borrowing costs is to approach your existing bank or financial institution to request better terms. Some SMEs have also managed to supplement more expensive overdraft facilities with fixed period loans at a reduced interest rate and with 6-month payment holidays. These businesses have been able to offset a portion of their overdraft facilities (traditionally more costly), and to use the additional funding to secure goods and material required to close out sales orders.

Approach another bank to find alternative pricing on funding. Be sure to assess the terms and conditions of your current facilities before approaching another bank for funding to be sure you are getting a better deal. Banks generally like to see cash flow projections at this kind of planning, especially if you can clearly show when you will be able to repay the funds. Once the business has more affordable options, and If the penalties and fees related to a specific facility is too high to close it down completely, consider paying down the most expensive facility first or moving excess cash from your current account balance to the overdraft facility until the cash is required elsewhere (current accounts earn no interest).

Financing costs are often assessed once and then forgotten as more pressing matters arise. It’s important to assess the overall financing cost, that is the cost of interest, facility fees, transaction and account fees on a regular basis as commercial options and needs change.

Controlling company credit cards is essential; most businesses operate with at least one credit card and businesses need to assess the expenses that these cards are generally used for. Most credit cards offer interest-free periods, which is useful to any business, but be sure to assess how much interest has historically been paid on expenses that could have been managed at no additional cost as the interest rates on credit cards are often much higher that of other funding arrangements.

2. Improve debtors management

Many businesses require cash on delivery, but depending on the nature of your business, the moment a customer or client has received the goods or services and has either accepted a quotation or has received an invoice, the debtor’s management process starts. Timeous recovery of money owed to the business is essential for positive cash flow.

The debtors management process requires focus and discipline:

  • Assess the list of aged debtors on a frequent basis, this may initially be done daily and depending on the nature of the business but should be done no less than weekly.

  • Review the current payment terms of the business and remind the sales team of the generic payment terms, as well as the specific payment terms with clients and customers that have signed agreements.

  • Have a dedicated debtors meeting with all team members responsible for sales and assign a portion of the debtors to each team member to follow up and recover.

  • Make notes relating to the discussions and feedback received of each debtor to follow up at the next internal meeting.

  • Senior employees should be responsible for contacting long-standing clients or customers to ensure client retention whilst also pursuing payment of the arrear account.

  • Follow up calls to overdue debtors should be followed by a brief and polite payment reminder email.

  • The approach to each debtor varies depending or several factors including the agreed terms of any signed agreements, the amount owing, the number of days outstanding or overdue, and the stage of the debtor’s management process.

  • Do not go lax on delivery and new customer credit controls, conduct customer credit checks on new clients before doing business.

  • The aim is to contact the customer or client before the due date, instead of trying to collect once the debtor is overdue.

  • Offer discounts for early payment.

  • Use Electronic payment methods, the availability of online or electronic commerce will reduce debtors’ days to zero as you will receive cash in advance.

  • Request remittance advices to reduce temporary matching differences and eliminate communication errors between accounts departments.

  • Send monthly statement of accounts (including all associated outstanding invoices)

  • Send payment reminder letters at the appropriate arrear interval 30, 60 or 90 days.

  • When permissible, levy interest on long-outstanding invoices.

  • The Debtors management process should also provide feedback to the relevant operational team when customers provide direct feedback that requires attention (quality control or disputes etc.).

This article highlights two of several cash flow management tools that are available to your business and the specific circumstances and application will vary depending on the industry and other factors.

Article by Hannes Smith CA (SA), director at Fusilier Chartered Accountants

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