Cash Flow Management Strategies for Irish SMEs

Cash flow is by far the biggest area of stress for owners of Irish small businesses. It’s not poor sales, it’s not competition, it’s not even increasing costs. It’s cash flow. The time lapse between outflow and inflow of cash is the biggest concern for the majority of SME owners, and no single issue has led to more discussions than cash flow.

There is hope because most issues around cash flow are solvable once you understand them better. Here’s a breakdown of the most common issues and ways to resolve them, including options if you need help getting out of cash flow debt.

Why Cash Flow Catches Good Businesses Off Guard

Profitable does not necessarily mean cash-rich. A business can be extremely busy, expanding quickly, but still experience a shortage of cash on a Tuesday morning because there are three unpaid invoices with an upcoming payroll deadline on Friday.

Seasonality adds to the problem significantly. The local hardware store in Leitrim, for example, may earn a third of its yearly turnover during the spring and summer seasons, while a catering business may struggle in December and barely get by in February. There is often little correlation between cash coming in and going out when income is seasonal.

Late payments by customers constitute another major cause of such a problem. Late payment is quite prevalent in certain industries in Ireland, and it is not uncommon to have debtor days of 60 or even 90 days in business-to-business transactions. Each extra day a client takes to pay an invoice means another day’s worth of lost liquidity.

The Basics of Staying on Top of It

Effective cash flow management involves more visibility and practice than anything else. The following tips will make all the difference.

• Have a rolling 13-week cash flow projection updated each week. This does not require anything sophisticated. Simply having a sheet showing estimated revenues and expenditures per week is sufficient to give you an early indication of trouble spots.
• Send out invoices immediately after delivering the service. Each day between delivering the service and issuing the invoice is another day before you receive payment. Try to turn invoicing into a daily practice.
• Shorten your payment terms where possible. For instance, if your default is 60-day payment terms, consider whether they are really needed. You may be pleasantly surprised to find that many people will pay within 30 days if that is all your invoice states.
• Maintain a consistent and unfazed follow-up strategy for late invoices. Having a system in place that involves polite yet persistent follow-ups on day one, seven, and fourteen past due is sure to bring significant improvements in average debtor days.
• Timely expenditure management is key. If you have some leeway regarding when you pay off certain bills, time it carefully.

When the Gap Is Too Wide to Manage Alone

In some cases, however, all of the above measures may prove to be insufficient. Large project wins call for substantial investment before profits start rolling in. An unusually quiet quarter results in depletion of capital built up over months. Machinery goes out of order before the time is right to replace it.

This is when external funding comes into play, and it should be noted that its use does not imply any trouble. As a matter of fact, those most aware of their financials consider working capital funding a planned measure rather than a last resort.

The finance option that will work best for you depends primarily on how your revenue is structured. For companies that use credit cards, the ability to have repayments vary according to daily sales is far more useful than the obligation to make a set monthly repayment, as low sales days would result in lower repayments. GRID Finance provides such a system with its Merchant Cash Advance service for companies dealing directly with consumers, tying repayments to the revenue raised by card payments.

In the case of B2B companies that rely on invoices rather than credit cards, it is possible to have a repayment service that varies according to a rolling weekly revenue average.

Equipment Costs and Cash Flow

Another cash flow issue that usually surprises most business owners is the unexpected need to either repair or replace a major item. Whether it is a commercial kitchen stove for a restaurant, a truck for a business involved in trade operations, or equipment used in manufacturing, any major equipment failure could become an immediate threat to your business’s cash flow.

It is more advantageous to use business leasing because it helps you purchase the necessary equipment without having to pay the full cost immediately. The best thing about this is that you have plenty of time to finance the purchase while maintaining your working capital.

Building a Buffer Before You Need One

One cash flow habit that you can cultivate above all others is acting ahead of the pressure. A company that is in a favourable position to work out its sources of capital will always be in a better position than a company that tries to fix things after there has already been a problem.

This includes reviewing the status of your company’s cash flow at regular weekly intervals. This also involves anticipating those months when cash flow will be low instead of waiting for the problem to arise each year. Finally, this involves considering different choices for your company before there is an actual problem.

Cash flow management is not something that you can manage in isolation. Rather, it is a continuous process of making decisions based on accurate knowledge. Companies that are good at this task do not have more money than anyone else. Rather, they are able to plan based on what they know.