Cash Flow Management for SME’s

One of the biggest pitfalls in small businesses is cash management, that is, if you have it to start with. The oldest trick to cash-flow management is securing liquidity by timing payments or expenses to after cash is received from your customers. Easier said than done as for some reason, something always breaks and needs urgent fixing and there goes all you’re planning and budgeting. Below is a few things that you can put in place to get a little relieve:

1. When registering for VAT, you are given an option to either use the invoice based method or the payment based method, always choose the payment based method. Choosing the invoice based method means that, every time you invoice a client, you have to declare that in your VAT return and pay for VAT on that invoice in that period. Let’s use an example. Say you are reporting for VAT every odd month (Jan, Mar, May, etc.). On the 28th of May you Invoice your client with expected payment in 30 days. If you are using the Invoice method, you will need to include that invoice as part of your revenue for your May VAT return submission which is by the 25th of June and pay the output vat due on that invoice then. This is so even though you are only getting paid on the 27th/28th of June, putting your business in tight cash position especially if you are also paying salaries on the 25th. Using the Payment method means that you will only declare that income when you receive it, so you will only pay for it when submitting your July VAT return. This further gives you an opportunity to earn a little interest on the amount payable if you put it in an interest earning account. If this was not a consideration when registering for VAT, do not sweat, you can apply for a change.
2. Secondly, I find most entrepreneurs do not use lines of credit, even if they come with no interest. You can open lines of credit with your suppliers by:
   1. Spreading payments over a period of time. If you have a big expense, say purchase of machinery, you could ask that you pay for that over six months. For example, instead of paying off a laptop upfront, how about you get a game credit account or an I-store credit account. This temporary relieve allows you to cover your immediate revenue generating expenses without being compromised. Furthermore, then you do not you use your bank line of credit which accrues interest and bank fees.
   2. Did you know that it is cheaper to finance capital assets with assets loans than with a credit card or overdraft facility? Capital assets stand as collateral for financiers therefore carry lower risk and lower interest whereas, overdraft facilities are not backed by anything, therefore carry exorbitant interest rates.
   3. Also, banks are not the only credit providers, if your do a little digging you might find other cheaper capital providers like development funders.
3. Your customers will push to pay later and if you are not flexible, you might lose their business. Try not to have a blanket payment terms policy for all your customers (unless you are in retail, then it becomes messy), if there is room, push others to pay earlier, therefore spreading your cash receipts throughout the month, say the 15^th, 21^st, and 30^th.
4. How about negotiating terms of payment with your suppliers? If you know you are expecting payment on the 15^th then negotiate to pay on the 20^th. Most SMEs doing business with government are struggling as their payment terms are not the standard 30 days at times. So if you have been using a supplier for a long period of time and have built rapport, it is time to ask for a little room to wiggle.
5. Employee costs are a big overhead to carry. Make sure you negotiate on gross pay basis and not netpay. I know this is obvious, but if you are new in business, you can get burned as that means you will have to carry the employee tax. ideas to reduce the burden are:
   1. Before hiring permanent employees, especially in production, try contractors that get pulled into projects, therefore when there are no projects you do not pay.
   2. Pay for deliverables for support services. You do not have to carry an accountant, marketer or HR specialist on your payroll, outsource the service and pay for deliverables. Once you are established and have built some working capital then you can start pulling those resources in.
   3. Use interns or trainees, their cheap resources and eager to learn and gain the experience. Some may argue the cost of training is too hefty, however, if you have well developed processes, this would be a once off costs as you will train the first group and have that group supervisor new enrolments.
   4. Use a mixed package. Instead of offering a fixed pay, rather have a minimum pay and a commission for all revenue generating roles. Commission is an incentive for employees and should result with increased revenue and high productivity.

These tips do not work for all businesses. It is disastrous to ignore cash management and might result in your downfall. As you know your business, you know where the holes are or where there is wiggle room. Spend some time looking for ways to reduce your overheads or delay payments. Always make sure that there will be no penalties or interest resulting from any delays.

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