Cash management for small businesses
A small business is a private entity, which can take the form of a partnership, sole proprietorship or corporation.
The measures used to define a small business are mainly the number of employees and the annual gross income. The Minister of Finance, in defining small business for the Small and Medium Enterprise (SME) Support Scheme, had used a gross annual turnover of $20 million.
Small businesses can be found in the retail and service sector, such as convenience stores, restaurants, hairdressers, professional services, and information technology (IT) businesses. This article will deal with one of the many challenges for small businesses: cash flow management.
Simply put, cash flow management is the process of controlling the money coming into the business (inflows) versus the money being spent (outflows). It is imperative that small businesses have the level of cash required to run regular operations in the first place.
The company’s operating activities consist primarily of the acquisition of goods or services (outputs) and the sale of those goods and services to generate revenue (inflows). Some of the strategies a small business can adopt to effectively manage its cash flow from operations are:
• Ask for payment in advance or cash on delivery – this way the money is received in advance. One incentive to get money up front is to give discounts. This can erode margins, but it can also keep customers coming back.
• Set the credit period as short as possible. The nature of the goods or services will determine the period your customers will have to pay, for example, Fast Moving Consumer Goods (FMCG). A typical credit term is 30 days after the invoice date.
• Match vendor payment terms with your credit terms, i.e. vendor invoices must be paid the same within 30 days of invoice date or better yet, at least 45 to 60 days after invoice date.
• Review profit margins to ensure they are not being eroded with rising costs. If this happens, consider the price of the goods or services. If the price of the product cannot be increased, reduce the direct or indirect costs associated with the product.
• Manage inventory levels – don’t overstock and practice just-in-time purchases whenever possible to prevent cash from being tied up in inventory.
• Reduce or reduce discretionary spending. The way small businesses work post covid19 will change, so it is essential to consider expenses related to activities that will no longer be necessary and eliminate them if possible.
• Real-time management – ensure transactions are recorded accurately and completely in a timely manner, including:
Filing of receipts;
Monitoring of customer accounts.
• Generate data – prepare financial statements, at a minimum an income statement, bank reconciliation and accounts receivable.
Cash management in covid19 environment is mandatory for small business survival. Here are some options put in place by the government that should be optimized:
• The SME Recovery Loan Facility: Since its inception, the duration of the loan has been increased to a maximum of seven years with a two-year moratorium on principal repayments. The government now guarantees 100% of the loan and no payment is required from the client for two years. The interest on the SME recovery loan will be paid by the government and there are no management fees on these facilities.
• Refinancing of loans with the respective financial institutions.
• Acquire low-interest loans from the credit union initiative.
Cash management is the heart of any business, as poor or inadequate cash flow management can lead to long-term bankruptcy, hence the phrase “cash is king!” »
The Trinidad and Tobago Chamber of Commerce and Industry thanks its member, Isha Reuben-Theodore, for contributing to this article.