EFFECTIVE CASH FLOW MANAGEMENT FOR SMES
Brian Whitford, Head of Marketing for Bartercard UK
Brian Whitford from our partner Bartercard have written an article on why it’s so vital for small businesses to manage their cash flow effectively and the steps they can take to achieve this.
For many businesses – cash is king. Managing the time between your customers paying their invoices to the time you have to pay your suppliers and employees poses a difficult dilemma, and often the answer is effective cash flow management. For SMEs, this may mean delaying outlays of cash as long as possible but it needn’t be.
What is cash flow?
Cash flow is the movement of funds in and out of the business and may be in two states – positive or negative. Positive cash flow is when cash coming into the business is of greater value than the cash leaving your business, whereas negative cash flow is when the outflow of cash is greater than the incoming. The latter can be bad news for business. One of the many direct impacts of poor cash flow is that businesses are forced to cut back on activities, such as advertising, marketing and training, which may help grow the business. However, there are steps and ways to help resolve the situation and generate more income without having to cut key business activities or expenses.
Achieving a positive cash flow can require hard work. Businesses need to closely monitor and manage cash flow to effectively control outgoing and incoming cash. Achieving effective cash flow management is the first key step and makes good business sense regardless of the economic conditions. During uncertain economic times or when consumer and business confidence is fluctuating, it becomes more important than ever. This means that SMEs must manage their cash flow effectively and ensure they stay within their means. Unfortunately, doing this in practice isn’t as simple as deciding to reduce spending.
Instead, it’s essential that businesses very carefully consider the areas in which they can make savings, as well as the areas where they can’t – those areas where they get sufficient return on investment that reduce spending would damage the profitability of the business. In this scenario, businesses might identify that their outgoings have become too great even if they implement all possible savings. It is in these situations that there is a strong business case for finding other ways to pay for goods and services, such as business-to-business bartering.
Managing your cash flow
For businesses of any size, the main cash management goal will include increasing and accelerating money coming into the business and decreasing and decelerating the amount leaving. This can mean complicated agreements with both debtors and creditors. For example, increasing the speed of cash in by reducing trade terms you offer debtors and slowing down the speed money goes out by asking for longer terms for your creditors.
The speed money comes in can of course be increased by billing promptly and asking for deposits, and decreased by securing lower monthly repayments on long-term debts.
Protect your cash reserves
Business-to-business bartering is particularly important for businesses unable to make these savings. In the case of a business-to-business trade exchange, this means owing goods or services to other members of the trading network. For instance, a hairdresser could pay an accountant who is also a member of the trade exchange in trade pounds instead of cash. If the accountant charges £300 for the work carried out, the hairdresser owes haircuts to that value within the network, while the accountant can spend that amount with other members.
This offers a clear benefit over bartering in its earliest form because the two parties don’t need to require each other’s services for a deal to take place. More important than the advantages over the earliest forms of bartering, however, are the advantages over paying in cash.
If, for instance, the hairdresser rarely has an appointment during weekday afternoons, bartering offers a chance to book customers in during this time and earn trade currency that can be used to cover costs, without losing out on cash-paying clients, who may only visit during the evenings or weekends.
In the cash world, excess inventory might be disposed of through discounting or just written off, bartering also allows the full retail value to be charged in trade currency. It’s clear that difficult economic circumstances can force businesses to find ways to preserve cash, there’s always a firm business case for looking at how to manage cash flow and therefore boost profitability.
If you are interested in managing your business’s cash flow more effectively, why not look into joining Bartercard’s 55,000 strong network and make use of your spare stock/capacity? Visit bit.ly/referbartercard and speak to one of their representatives. BES clients are entitled to 65% off the standard joining fee!