Managing cash flow for SME in challenging times

To be able to make the best possible decisions in a challenging environment, you need to know the most up-to-date information on the financial position of your business.¹ This includes determining the cash position of your business, like calculating the cash you have deposited in the bank, and determining what assets you can sell quickly if required.¹

Prepare a cash flow forecast and update it regularly. It will help give you a forewarning of any cash flow problems and allow you to act early.¹ If you use an accounting software, you should be able to use it to prepare the cash flow forecast, if not, speak to your accountant for help.¹ Quantifying your forward bookings – including forward orders and work-in-progress – is a good way to identify your future cash flow as well.¹

Identify your key business indicators as they will quickly tell and track your business performance. They include value of daily sales, cash balance of the business, debtor’s balance, value of orders and bookings. Continually measure these indicators to stay informed.¹

Analyse your financial statements to determine the financial health of your business.¹ This is fundamental to assisting you in deciding what you can and should do to manage through the crisis.¹ Review the numbers regularly so that you detect and address adverse movements or opportunities earlier.¹ Also analyse your liquidity and solvency on a weekly basis, if not daily.¹ 

Now is not the time to be Mr Nice Guy. You need to be firm on debt collection while being fair. Contact your debtors and ask them to pay you even before the due date. If they are experiencing cash flow difficulties themselves, negotiate periodic payments and make sure they stick to their side of the deal. Produce aged debtors reports and follow-up diligently. Check payment progress every day and address any slow payments immediately.

Incentivise customers to encourage them to pay early or at the point of purchase to reduce debtors. Consider introducing upfront deposit requirements for critical items required by your customers, so you share the supply chain risk. Offer rebates or discounts on pricing for full upfront payments, and only pay commission to sales staff when you receive payment on their sales.

It is also always a good business practice to invoice as soon as goods or services are delivered. If it is a large order, use a progressive payment structure and consider collecting 80% before delivering the products, and the balance upon final delivery.

Operate as lean as possible and trim spending you believe is unnecessary during this period.¹ Some spending cuts may need to be drastic.¹ But be cautious because such cuts may make it very difficult for your business to fully recover.¹

You can cut costs by:

• Renegotiate supply arrangements to reduce the price you pay, the size of your orders and extend your payment terms¹
  
• Renegotiate your credit facilities with your lenders to get cheaper interest rates and better terms¹
  
• Renegotiate leases to get lower rent and better terms from your landlord¹
  
• Negotiate the postponement of the delivery of any high value items that are not needed at this time¹
  

Also delay capital expenditure unless absolutely necessary.¹ With staff working from home, you may find it essential to spend more on technology to support such change in the work environment.¹ But for any other capital investment, ask yourself whether to make such an investment during these uncertain times stack up.¹

Speak to your bank about a new loan, increasing your current credit limit or restructuring your current loan.¹ If there are available government grants or financial assistance, try to take advantage of them.¹

In the short term, you could consider injecting your own funds into the business to keep it viable or reducing your drawings from the business.¹ Determine your own personal financial position and only commit your personal money into your business if the business will remain viable.¹

Finally, you could consider seeking external investors that can help inject funds into your business.¹ However, you need to be aware that you may not get a fair valuation for selling a share of your business during this period and giving up a share of your business may reduce your control over the business.¹

No one can really predict how long this crisis will last and what the road to recovery will be for business. However, business owners who are proactive in protecting their financial position may find themselves in a stronger position when the recovery comes, opening up future opportunities for growth.¹

In the meantime, we’re here to help. Speak to us to find out how our financing and cash management options can assist with your business cash flow through this challenging period.    

Disclaimer: 

The content above is intended for informational purposes only and should not be treated as business advice.

HSBC does not endorse any recommendations from 3rd parties mentioned in this article.

¹ CPA Australia, Managing through COVID-19.