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How to balance growth with cash flow

Accelerate SME

Understanding and managing cash flow can make or break your business. Entrepreneur Craig Moore, founder and chief executive of Beehive, the region's first peer-to-peer lending platform, hones in on common cash-crippling scenarios and shares his tips for avoiding them.

SME rule of thumb

When it comes to working out how much cash reserves a business should maintain, it's going to be dependent on the type of business and how predictable revenues are. If you've got predictable revenues and you're a profitable business, then you would probably hold about three months' worth of cash. If you're a "lumpier" business, you might want to keep six months of cash. If your business does big-ticket transactions or you have a few high-value customers, then you've got to make sure that you bridge those gaps between transactions. You need some proper forecasting, some empirical evidence.

Starting out

It is hard to make cash-flow projections when you start out. For start-ups, it's a lot more difficult to have that buffer, which is why a lot of start-ups will raise equity in order to give themselves a buffer so that they can actually operate in the event of cash crises. Most people, when they launch a start-up, tend to be over-optimistic. They think cash will come in quicker than it actually does or they think sales will be quicker than they are. The worst thing is overtrading as a start-up - the imbalance between the work that a business takes on and its capacity to do the work.

Take note

The most common cash-flow shortfalls range from set-up costs and maintenance to staffing. Here are four not-so-obvious scenarios all SMEs must be aware of.

1. Delayed payments

Delayed payments, especially if your debtors are larger businesses who can impose a delay, can present a problem. It goes back to the old saying, "revenue for vanity and profit for sanity". If the big companies want to buy your product, sometimes an SME can lose sight of the fundamental economics and say, "absolutely, I want to sell to this big, blue-chip company". But if that big blue-chip is going to take 120 days to pay you, you've got to plug that working capital gap.

2. High-grossing SMEs

Then you have got businesses that are really high-gross SMEs that need more working capital; they're almost struggling through their own success. They are growing so quickly that they need cash to come in to help fund the expansion. It's almost a good problem to have, but could be a bad problem financially, and potentially bring the business down.

3. Recruiting in advance

Hiring staff ahead of growth or a contract you're hoping to win is something to be mindful of. If you're trying to win a big contract and they want proof that you have the staff needed to deliver the job, then you're recruiting in advance of that business, and certainly in front of payments from that business. That can be problematic if the project is delayed or falls through. Before you know it, the business is fulfilling a contract that is loss-making because the SME has not been able to negotiate the type of terms that allow it to apply penalties or hedge the risk.

4. Change in credit lines

If the local market gets some economic quivers, banks could pull credit lines, like overdrafts that companies have become reliant on as part of their revolving credit. The bank could convert that overdraft into a loan, or even worse, insist that you have to pay the overdraft back within a specific timeframe. The banks can change their terms as and when they like and that's the problem. That has got nothing to do with the business owner's ability or inability. That is external factors being imposed because the bank has changed a mandate - perhaps based on the industry that you operate in. That is where you will get sudden collapse of businesses.

Preventative methods

Companies should be running an accounting package, and creating monthly accounts and weekly cash flow so they understand how much cash they have got. As good practice you should be getting audited on an annual basis because that makes it easier for banks to lend. If the banks change your credit line, at least if you've got good accounting records, good tools and processes and audited accounts, banks are going to look more favorably on you to lend. For contracts, make sure you build payment milestones into the contract so you're not waiting until the end of the contract to get paid. You need to try and match your expenses with your revenues. If you've got stock then make sure that you've got a stock system so you understand how you're turning your stock. On the front end, make sure you understand your pipeline and conversion rates; again this allows you to plan if you're looking out on the next six months.

© Zawya BusinessPulse QATAR 2016

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