How can SMEs increase cash flow?

Business Insights

As COVID-19 affects businesses across the globe, small business advisor offers help for small firms

Reece Tomlinson, CEO and Founder of RWT Growth, comments on cash flow solutions in an unprecedented economic climate

Cash flow is often an issue for small firms in more normal times - with research showing that 3 in 5 SMEs have experienced this very issue - and in the current climate this difficulty is only exacerbated. Despite Government incentives and help, many businesses have been impacted negatively by the COVID-19 crisis. In almost every western country, to help increase cash flow for firms, loans are being offered with interest rates at nearly zero to help ensure businesses remain open and operating; however, a selection of SMEs - especially in the UK - are struggling to access these schemes.

Reece Tomlinson, CEO and Founder of RWT Growth - financial advisors for the global SME arena - provides advice on how small businesses can increase cash flow, outside of Government schemes:

    1) Lower your costs.

    When a business is facing cash flow issues, lowering costs is a key element in turning the situation around. Now, when some firms are experiencing a dip in profits, action needs to be taken to correct the underlying problem. Regardless of the size of the business, discretionary and non-crucial costs can be decreased or cut out entirely. The aim is to cut costs so the company is generating positive cash flow again, without detracting from the core of the business and its ability to provide its goods or services.

    Examples of discretionary expenses include: non-immediate ROI (return on investment) purchases, printing, and employee perks. As a guide, businesses should cut expenses that their customers would never see versus those which could impact the customers’ experience.

    2) Delay or revise capital expenditures.

    A capital expenditure is generally defined as an expense that benefits the company over a long period of time. Many businesses find themselves with cash flow problems due to capital expenditures in which they use cash flow from operations or their cash reserves to fund them. Whilst reinvestment back into the business is not a bad thing, the problem can stem from the fact that free cash flow is needed for operations and by using such cash flow to fund major purchases and investments, it reduces the firm’s cash on hand. The simple solution is to either cease such purchases, or rather finance them through other methods such as long-term debt, capital leases or slowing down the rate of investment. Although it may seem counterintuitive, the cost of borrowing for a capital expenditure may be significantly less than the cost of having to deal with continued cash flow problems, as well as the costs associated with issues such as late payment.

    3) Decrease customer payment terms.

    If customers are provided credit by the business it can present a plethora of challenges from a cash flow perspective. In such an event, aim to reduce credit provided or reduce the time in which a customer is permitted to pay their invoice. For example, if the customer is provided with 30-day terms to pay an outstanding invoice, either reduce the terms, or offer an early payment incentive, such as 2% off the invoice if it is paid within ten days, in an effort to entice the customer to pay it early and boost incoming cash flow.