Cash flow management for a small and medium-sized enterprise isn’t a piece of cake. There can be leakages and eleventh-hour requirements, leading to mismanagement of cash flow and an imbalanced balance sheet.
Better cash flow management is pivotal to any business’s smooth running. Particularly, companies in the start-up phase cannot afford poor direction of cash flow as it can directly impact their reputation with lenders and creditors and adversely affect business functionality.
Cash flow management determines how much money is coming in and going out of the business, which can help prevent the liquidity problems a company can face in the future if your business is constantly spending rather than earning. For all businesses, especially small businesses, it is necessary to have enough money to pay creditors and avoid extended cash shortages, mainly because of a considerable difference between cash inflows and outflows.
Here are some of the top concerns and potential solutions for managing cash flow for small and medium-sized businesses.
High Amount of Credit Dealing
This is usually the case with manufacturers and wholesalers. Most buyers typically work on a minus-one crediting formula. It is quite a risky situation. If the buyer runs out of money or fails to resell the stock or whatever happens, there’s a high chance of delay in payments or no payments at all. It causes many issues for the manufacturer or sellers and can lead to asset liquidation or even bankruptcy. While there may not be an apparent solution since the entire industry runs on credit, here’s what you can do.
Credit insurance is a viable solution to protect businesses against non-paying clients. Remember the college security deposits you had to pay at private institutions? Credit insurance works exactly like that. Your crediting clients deposit a set amount of money before entering your credit dealings. If the debtor cannot pay off your dues because they are bankrupt or facing cash flow problems, you can always utilize the credit insurance money and pay them back later once and if they pay you the due amount. It can further help you manage your cash flows easily and prepare you if your debtor is going to be a bad debt.
Loans with High-Interest Rates
High-interest loans are another critical concern for small and medium-sized businesses regarding cash flow management. A high debt causes difficulty in managing the cash flows and is a common problem a company faces. A high-priced loan with higher interest rates from the bank can disrupt the cash flow if the sales targets are not meeting requirements.
The best solution to having extensive debts can be refinancing your loans. Refinancing the loans means replacing the high-interest-rate loan with a lower-interest-rate loan, reducing the payments by decreasing the interest rate. Moreover, suppose the business must make higher payments. In that case, you can also consider cutting other overhead expenses, such as finding a cheaper supplier to reduce your cost of sales. You can also increase the selling price of your products, increasing the return on capital employed, further increasing your inflows, leading you to pay your debts relatively quickly.
Surplus Inventory
Hoarding is as harmful to business as it is to a household budget. An excessive inventory restricts the cash flow and risks potential loss given the expiry or timeliness of the goods stocked. A surplus inventory usually happens when a manufacturer manufactures more than demanded products or a product quickly goes out of trend, causing declining sales. It causes the business to have higher amounts of current assets, i.e., the closing inventory, and makes the management of the cash flows rather tricky to handle. The stock stays longer on the shelves, which might result in obsolete stock, and it will take up extra storage, again increasing storage costs and resulting in higher expenses and high outflow.
You could use the just-in-time production method if you’re in a manufacturing business. It will ensure you produce only the necessary inventory that could go to waste later. This way, there wouldn’t be any additional costs, and the cash flow would be stable. If you’re in a retail business, you should only buy the amount of inventory you are sure will be sold. The company will have fewer current assets, and the income will be higher, reducing the outflows. Further, it makes it easy to analyze the cash flow position.
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