It’s normal for a small business to face cash flow problems at one point or another, especially when they’re scaling. Fortunately, most cash flow problems can be solved with adequate preparation and planning.
Here’s a list of the most common cash flow problems businesses face in Singapore and how to solve them.
1. Expecting profitability too quickly for every new activity
This is not just advice for startups. Businesses 5, 10 years in still face this issue.
When you run your first digital ad, you probably expect leads flooding in. Or expect crazy savings after implementing a cloud accounting system. But that may not be the case for your business.
Just like losing weight. You didn’t put on weight after eating one fast food meal. You probably ate that way for months, if not years. So you can’t expect to lose weight after a day or two.
The common reason why many business owners get jumpy to see immediate results is that they don’t have enough float.
Not giving enough time to bring to fruition could severely impede your long term success. And you’ll be stuck complaining that “everything doesn’t seem to work”.
What you can do is to start building a cash reserve for your business. Having a budget of current and forecasted expenses helps in this process.
You can use the budget to determine the size of the reserve. This will put your mind at ease a little and trust the process.
2. Not having a cash flow budget
Also known as a cash flow forecast, it’s an estimate of how much your business needs to receive and pay.
This budget can be a lot more useful than the traditional budget where you set aside a fixed sum for the day-to-day running of the business. Because it allows you to see your financial position at any point in time.
Don’t pluck numbers based on what you think. Use numbers that reflect reality!
Review and update your financial statements as often as necessary. At a minimum, look at them once a week.
Keep in mind that this is helpful only if your accounting system is up to date. If you’re using an accounting software, your entries should already be in its proper place and your statements are balanced.
We recommend you review the following statements:
- Payables ageing
- Receivables ageing
- Cash flow statement
- Profit and loss
- Balance sheet
- Bank statements
Reviewing your statements regularly helps you anticipate cash flow problems and handle them before they become an issue.
3. Collecting receivables too slowly
You may have success in selling and moving inventory. But if payment isn’t coming in on time, that spells trouble for your business cash flow. And with most companies having a 30 or 60 day payment term, it can be quite a stretch.
Small businesses like yours don’t have the luxury to wait this long. Especially when your business is growing quickly, you need as much cash as possible.
Having money on paper but not being able to use it could seriously affect your business activities.
There are three possible ways to solve this problem.
(1) Give your client an incentive to pay earlier.
Eg. offering a 2% discount for payment in 10 days could be an attractive offer. But this would require you to negotiate with each client. And you’ll need to find a number that’s comfortable for you, based on deal size.
(2) Invoice factoring. Here’s how it works:
- You submit the invoices for purchasing
- The factoring company sends you the advance (e.g., 80% of the invoice)
- Your client pays 30 to 60 days later
- The factoring company sends you the rebate (e.g., 20%, less the fee)
(3) Automated notifications and chasers
4. Overlooking high overhead expenses
This is a no-brainer for most business owners. Costs like rent, telephone, utilities, vehicle leases could eat into your profits.
High overhead expenses are particularly challenging because they’re persistent. Even small things add up and if you’re not careful, pull you down.
The solution is simple, but not easy: Audit your expenses and cut back where you can.
You have to be careful with this though. Cutting back SHOULD NOT affect the quality of your product, service and customer experience.
Sit down and see how removing them will affect your business cash flow. Involve others on your team to get their input too. They can bring valuable insight into the goings-on of the company that you might not even be aware of!
5. Poor (or no) bookkeeping practices
Many businesses dread handling the bookkeeping of their business. For them, it’s unproductive and even unnecessary.
Careful there! This sort of thinking could cost you your entire business.
Having bad, or no bookkeeping means you’re unable to track your payments, deposits and financial activities. Sure, you’re a small business with a small team. But you don’t want to be making blunders with taxes and getting severely penalized.
Get a cloud software like Dahsbod that’s simple to use. You don’t have to be a chartered accountant to use it. DashBod gives you a clear picture of your financial position and prepares you for tax season, any time.
Alternatively, there are plenty of bookkeeping services that you could outsource your work to.
6. Seasonal demands
Some businesses are evergreen, some have distinct peaks and troughs. During low seasons, you’ll need all the cash you can get.
It’s no laughing matter because you still bear most of the fixed costs, while experiencing way lower sales.
One can only imagine how scary it is to see your float decrease. And an even scarier thought that you might have to grab funds from your reserves. Hopefully, you already have one in place. If not, you definitely want to consider having that as an option.
There are a few things to manage this well. See solution #2 and #3 above. Additionally, for whatever few payments you have, make it easy to get paid.
For instance, if you have a client that you charge the same amount to monthly, like on a retainer or subscription basis, you can set up recurring-billing to automatically charge their credit card monthly.
This way, you can spend less time waiting for the cash to hit your bank account and less effort duplicating invoices.
You might be interested in: Advice from a CFO: It’s not you or your team, it’s your accounting system software
7. Insufficient profit margins
Your profit margin is an important metric to track because it tells you how much your company is making from the money it earns.
A low-profit margin either means your cost is too high, you’re selling too low, or both.
This scenario happens in highly competitive markets where companies face pricing pressure. And it usually affects small business owners who do not have a strong understanding of their costs and their true value.
Audit all your products and services (you should already have a chart of this. If not, get a software to help you). Calculate your all-inclusive costs.
If you can, raise the prices of products/services that have weak margins.
If you can’t raise prices, consider dropping them from your catalogue.
One thing to keep in mind
Cash flow is the lifeblood of a business, and even more so in Singapore. Having insufficient cashflow could threaten your ability to stay in business.
If you’re one of those business owners fighting technology, don’t. There was a time when bicycles were all that was needed. Then cars came. We learned, adapted and it’s improved our lives.