Improve Cash Flow Management For Business Growth in 2020: The Definitive Guide

Singapore companies must improve their cash flow management in order to unlock the cash they need for growth and daily operations, especially in 2020.

Businesses in Singapore are feeling the brunt of volatile economic times and interest rates that are constantly on the rise. In order to manage operations, finance growth, and mitigate a myriad of risks, these businesses must focus on augmenting cash management.

According to a study carried out by SPRING Singapore and PwC Singapore, businesses experienced a year on year decrease in revenue of 2.6%. NWC (Net Working Capital) on the other hand, saw a year on year upsurge of 3.5%. Net working capital is considered the lifeblood of any business. If a business does not optimize its capital properly, this can have a major negative impact on the business. Working capital is the money used to run daily operations, and to steer the company towards growth.

The study further showed that half of the sectors that participated showed a deterioration in working capital performance. There are several reasons why working capital can be negatively affected in the business as follows:

Issues Negatively Affecting Cash Flow

There are several things that can happen to put the financial life of your business on life support. They include the following:

1. Inability to manage debt. If you have taken on too much debts, this can increase the interest rates you have to pay, and the amount of money you have to folk out every month just to make payments. It is in your best interest to reduce your debt either by selling off some of your assets to pay a lump sum, or you may need to consolidate your date in order to make the payments more manageable. Of course, you must consult your accountant and where possible a credit counselor so that you can find the best solution to manage your debt.

2. Poor collection of accounts receivable. In order to run a healthy business, you must be able to collect on your accounts. If you have sluggish collection on accounts receivable, then you can be sure that you will run into cash flow management problems. You need money to come back in so you can run your operations properly.

3. Inventory control problems. If you are looking to create a cash flow dam, purchase lots of inventory and let it sit in the warehouse. Should your stocks not move fast enough, you may even be forced to sell it at a discount. Either way, you will be losing money. You need to be able to find a balance between the stocks needed to meet your customer’s demands, and how long it takes your suppliers to fill out your orders.

These common problems have the capacity to seriously interfere with how you manage your cash flow.

Working Capital & Company Size

The study found that the size of the company matters when it comes to the management of working capital. When looking at working capital as a percentage of sales, it was found that companies that are very large work well at 8%. Large companies were at 15%, medium sized companies at 18%, and small companies were at 14%.

Companies that are very large are able to take advantage of the economies of scale. Additionally, they have access to additional funding with better interest rates. Small companies on the other hand run small operations that are less complicated. Their processes and working capital needs and management are quite straightforward.

The challenge, it seems, is with the mid-sized businesses. These were found to be struggling to strike that balance that allows for easier management of working capital. There are several reasons for this:

• They tend to be in the growth phase and the costs incurred for growth are higher.
• They find it difficult to access the funding they need to take the business to the next level, and when they do, the interest rates are not favorable.

This means that mid-sized companies often find themselves fighting to get some cash, but have little to no negotiating power. If the company management is inadequate and has lagging systems and tools, then their poor performance can actually be exacerbated. Additionally, if the company is growing too quickly, there can be many other unforeseen problems.

Negative Effects of Fast Growth on Cash Flow

Growth of a business is a beautiful thing, but when it’s too much, too soon, you are in danger of having everything come tumbling down around you. This can pose a great financial risk in terms of business solvency. Here are some of the problems you can expect to see in such a case:

Fast growth is often accompanied by more debt
Growth takes money and if a company does not have the cash in hand, it goes without saying that they will have to take on debt to power that growth. Usually, if you are experiencing fast growth, you want to make the most of the opportunity so you go all out. Unfortunately, the end comes just as fast. When growth slows down, you are often left with debt issues if you had not thought it through carefully.

It is important to understand that rapid growth tends to be short lived, and then things level out and growth slows down. Should you have a setback during this time, your business can find itself spiraling fast towards insolvency. Even when you are growing rapidly, you should remain conservative about taking on debt. Grow at a steady pace.

Sometimes quick growth could lead to a change in product
It is important to note that not every business should be made big. Companies that make handmade products or offer personalized services may find that rapid growth doesn’t work well for their business model or product. If you know that the model you have currently is not scalable past a particular point, then it could mean that you will have to compromise your service or product, or you may have to change the product completely.

Unfortunately, this could have negative effects of its own including reduction of product value, lack of customer satisfaction, and lowering of demand. If you find yourself in a situation where you are experiencing rapid growth but your business model does not allow for it, then instead of compromising, it is best to slow the growth.

Problems with cash flow
Cash is the one most valuable thing for a business that is in the growth phase. If you have been closing deals, doing increased business, and are showing revenue growth on a weekly basis, you can easily mistake the growth of your accounts receivables for growth in cash.  If you are sluggish in collecting from the accounts receivable though, you may find yourself in a cash crunch.  The reason for this is that even though cash increases the speed at which cash comes in, it also increases the speed with which it exits the business.

Some of the expenses that are linked to growth are salaries, advertising, and inventory among others.  Your business needs to consistently bring in the money needed to meet these needs, and the cash sits with your clients and customers.

If your bank account balance is lagging way behind your accounts receivables, then you can be sure that the business is at a risk of lacking the cash needed for daily operations management.

When business is doing great, the tendency is to ignore other indicators of bad news
If the only metric you are taking into account when evaluating your business is revenue growth, you could be in more trouble that you think. The reason is that it is possible to increase revenue without necessarily increasing profit. You may not take note of this if all you are focused on is the appearance of business growth.

It is important that you look at the details because as they say, the devil is in the details. Look at how your liabilities are growing and seal any holes that may be present there. Also, consider any structural issues that may become glaring in the light of this new growth that should be dealt with quickly.

When the business is growing rapidly, do not ignore problem areas. Doing so could be disastrous for the business in the future. As you grow, your eye should be on every single metric and not just on the amount of revenue you are bringing in. This way, you will have a good feel of the financial status of the business and its solvency.

Mid-sized businesses should therefore keep a keen eye on the entire business. If any of the above has already become evident, work through it by keeping a finger on the pulse of cash flow to ensure that you have the money needed to take it from where it is now to where it needs to go in the next few years.

Becoming a Top Performer

Effectively managing cash flow can mean revenue growth, augmented business performance, and proper funding of your day to day operations. Companies that are able to do this well, those that are found in the top quartile of performance in this area, have been found to actually outperform other companies on the same level with them in all key metrics.

In fact, some of them are doing very well in key performance areas such as accounts receivables and are found to be paid forty percent faster than those who are in the bottom percentile. Additionally, they hold inventory that is 4 times less. Because they have more cash, top performers are in a better position to grow because they are able to finance some if not all of their investments. Moreover, securing funds is easier for them because they are able to table financial reports that look much healthier than those of their counterparts. If your business cannot be counted among the top performers, there are things you can do to increase or improve your cash flow.

Ways to Improve Cash Flow

Even the best of companies will always find that there is room for improvement in one area or another.  Since cash flow is the lifeblood of your company, you need to improve this area quickly if it is a challenge you are facing. These tips will help:

• Invoice Immediately. Some companies have a billing routine that includes invoicing their clients all at once, usually at end month. This means that your money will be sitting with the customer or client for longer than it should. The best thing to do is to go ahead and invoice as soon as you complete the job. If you are billing for service hours, it may even be a better idea to invoice fortnightly.
• Get an upfront partial payment. One of the best ways to ensure that you don’t get into a cash flow crunch is to ask for part of the payment upfront before you start the job. Most companies often ask for 40 to 50 percent upfront and the rest to be paid once the job is done. Sometimes you may even opt to break the bill into three parts. The first third can be paid before you begin the work, a third during project implementation, and the final third when the work is completed. You shouldn’t feel self-conscious when doing this because this is actually a business practice that is quite common. By doing this, you will be helping boost your current cash flow, and you will further be solidifying your projects that will make forecasting and cash flow analysis a lot more accurate.
• Reward those who make quick payments. Money owed but not collected drains your cash flow. By offering incentives in the form of discounts for clients who pay immediately, or within a particular time frame, you will find that your cash flow experiences a great boost. Most companies offer a discount of 2% for those who pay in under 10 days. It is important to note that if your profit margins are small, this may not be feasible. You have to make sure that the profit margin you have in place allows for any such incentives.
• Chase after receivables. It should be regular practice in your company to review accounts receivable and identify those that are past due. Follow up with these via email or phone call because there are clients who only need to be reminded. If you have been at this for quite a while and have been soundly ignored, it may be in your best interest to speak to a collections agency who can help you recover some if not all your money.
• Don’t pay bills until they are due. You don’t want to be forking out cash too quickly. It is important that you consider the payment terms offered by suppliers before paying. You should then make sure to wait and only make the payments at the due date instead of doing it right away. By scheduling bill payments, you will be able to organize yourself and manage cash flows by ensuring that you keep money in the business longer.
• Review your customer’s credit histories and your credit policies. One of the more important ways of managing cash flow is by managing your clients or customers credit. If you have some who are unprofitable, weed them out. If some of them pay slowly on a regular basis, flag them so that you know how much to extend to them or which terms to apply to them the next time. You may even decide not to extend credit to this client in the future since you are not obligated to do so.

With these quick tips, you can actually move your cash flow from a point of stagnation so that it begins to flow again. Remember that change is never easy, but be ready to take whatever challenges you may face head on.

It was found that leading players in business actually stress tested their process of cash flow management. The information they gathered from this process helped them balance between cost, service, and cash. They have a set of Key performance indicators against which they measure policies, terms, and processes in order to monitor their working capital. Top management supports the process and there is complete accountability where the management of working capital is concerned.

In order to make proper cash flow management possible, certain key things must be looked into especially if the company is in the growth phase. Here are some to consider:

1. Accurate forecasting. If you do not forecast accurately, you can be sure that things will go down the drain fast. Accurate forecasting takes into consideration how much cash you currently have in hand and how much is held in accounts receivable. You should be able to accurately track the money that you have in both of these areas. If you underestimate the importance of making sure that you have accurate forecasts, your working capital can suffer and the business with it.

Most mid-sized companies find that even though they extend a longer credit period to their clients, their suppliers tend to have shorter cycles. If forecasting is not accurate, the business can find itself in a difficult place without enough working capital to order for inventory or pay for services rendered. There must be a clear understanding of the working capital cycle in order to properly manage cash flow.

2. Restructure Receivables and Payables. You must give thought to this once you are done with forecasting. Prioritize based on the interest rates accrued and due dates. With proper restructuring, you will find that your cash flow becomes more flexible. Streamlining the payments process will also go a long way in increasing efficiency in the accounts department, and if that means getting new programs or tools in place, do so.

3. Support your accounting team. Your accounting team will often lead the way when it comes to the management of cash flow. It is imperative therefore, that you ensure they have all the tools and the support necessary to succeed. Look at the tech resources that they have and consider whether or not you should make improvements. Sometimes, “good enough” doesn’t cut it.

Ensure that your expense accounting is reliable as well because if it isn’t, you might have another cash flow headache waiting to strike. It is a good idea to keep your expense tracking system updated, but also to make sure that all expenses are recorded properly.

Basically, work to improve your tech tools and to augment resources and processes so that your accounting and finance teams can have everything they need to properly forecast and manage cash flow. This will make expansion easier because you will have the money to fund your growth initiatives.

The study concluded that the management of cash flow has consistently shown up as a challenge for SMEs. This means that Singapore businesses must indeed focus on how they are managing cash flow and specifically, how they are managing working capital.

With a study like this in place, they are able to look at how their peers are performing and benchmark their own performance against what they see. They can also tackle whatever problems they face when it comes to collecting cash, as well as improve their health financially for growth that can be sustained over time.

Furthermore, by getting a hold of the issues that face them and correcting them, they will also be better positioned to take advantage of the available sources of funding and investment since they will create value in their business. With a better bank balance and a growth trajectory, businesses will have more negotiating power when they approach financial institutions for the cash they need to take their businesses through the growth spurt.

Now that you have this information, it is in your best interest to put what you have learned into practice.  Start with the low hanging fruit and then work your way to the more difficult areas. You can also receive the study so that you can have a better understanding of how your business is doing within your industry and based on the size of your company.

By benchmarking your business and implementing the necessary changes, you will see marked improvement on your working capital in the next few months.

If ever in doubt, feel free to contact us and we can guide you along.