Cash flow management for small businesses

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A small business is a privately-owned entity, which can take the form of a partnership, sole trader, or a corporation. The measures used to define a small business are primarily the number of employees and the annual gross revenue. The Minister of Finance, in defining small businesses for the small and medium enterprises (SME) support programme used an annual gross 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) related businesses. This article will treat with one of the many challenges for small businesses: cash flow management.

Simply put, cash flow management is the process of monitoring money coming into the business (inflows) against money being spent (outflows). It is imperative that small businesses have the required level of cash to conduct regular operating activities in the first instance.

The company’s operating activities are primarily the acquisition of goods or services (outflows) and the sale of those goods and services to generate revenue (inflows). Some of the strategies that a small business can adopt to manage their cash from operating activities effectively are:

• Request cash in advance or cash on delivery – this way money is received upfront. One incentive of getting cash in advance is granting discounts. It may erode margins, but it may also encourage customers to return.

• Establish the shortest credit period as possible. The nature of the goods or services will determine the period your customers are required to pay, eg, fast-moving consumer goods (FMCGs). A typical credit term is 30 days after the invoice date.

• Match payment terms to vendors with your credit terms ie supplier invoices should be paid similarly within 30 days after the invoice date or better yet at least 45 to 60 days after invoice date.

• Review profit margins to ensure it is not eroded with increasing costs. Should that happen, consider the pricing of the goods or services. If the product price cannot be increased, then reduce the direct or indirect costs associated with the product.

• Manage inventory levels – do not overstock and practice “just in time” purchases as much as possible to avoid cash being tied up in stock.

• Reduce or cut discretionary expenses – Post covid19 small businesses's way of work will change, so it is essential to consider expenses related to activities that will no longer be required and eliminate where possible.

• Real time management – ensure transactions are recorded accurately and completely on a timely basis, namely:

 Customer billings;

 Supplier Invoicing;

 Depositing of receipts;

 Follow up of accounts receivables.

• Generate data – prepare financial statements, at a minimum, an income statement, bank reconciliation, and customer accounts.

Cash management within the covid19 environment will be mandatory for the survival of small businesses. Small businesses can avail themselves of the support programs being put in place by the Government. The following should be optimised:

• First Citizen Bank/Scotiabank/Republic Bank and RBC Royal Bank – $300 million to be made available via subsidised interest loans. Government will also guarantee part of the collateral required. These loans are to be used solely for salary payments, working capital and purchase of raw materials.

• Refinancing of loans with the respective financial institutions.

• Acquire low-interest rates loans from the credit union initiative adopted by the Government.

Cash management is the heartbeat of any business as poor or inadequate management of the cash flows can result in business failure in the long run. Hence the phrase “cash is king!”

The TT Chamber of Industry and Commerce thanks Nova Committee Member Isha Reuben-Theodore for contributing this article.


"Cash flow management for small businesses"

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