3 ways to prevent cash flow problems sinking your SME

Cash flow problems cause many insolvencies in Australia.
Posted on September 4, 2017 in Business

Surviving as an SME in a competitive business landscape is never easy.

A mere half (51 per cent) of businesses are still running four years after opening their doors, according to McCrindle Research. Further to this, ASIC figures show 46 per cent of insolvencies in Australia are due to cash flow issues or high cash use.

That's the bad news, but what's the good? With the right risk prevention strategies, SME owners can prevent poor cash flow from crippling their business.

1. Tackle late invoices

The latest Dun & Bradstreet data shows 9.3 per cent of businesses are paid over 60 days late of their stated terms. The average late payment is 14.6 days overdue, with organisations aged between two and five years the most at risk of becoming insolvent due to late invoices.

To strengthen your collection processes:

  • Set out clear, easy-to-understand payment terms;
  • Offer early payment discounts;
  • Invest in software to help track and chase payments;
  • Consider legal action as a last resort.

2. Optimise inventory management

SMEs often misjudge how much stock they'll need. Having capital tied up in inventory that's sitting dormant on warehouse shelves isn't an optimal use of funds, particularly if you're paying additional storage and insurance costs.

However, failing to have enough stock on hand to fulfil orders can leave customers frustrated, leading to churn, reputational damage and profit losses.

Establishing a sophisticated inventory management system is crucial to avoiding these problems. Many SMEs automate their inventory management processes using technology to optimise stock replenishment.

3. Reduce unnecessary overheads

ASIC's data revealed that poor financial control is the third most frequently cited reason for insolvencies, suggesting business owners could tighten up on their spending.

Savings can be made across a number of areas, including:

Office costs: Reduce stationery budgets by going paperless or investing in technology solutions. Also, encourage staff to switch off lights, computers and other electricity-sapping devices when they're not in use.

Rent: Could you downsize your current premises? Sub-letting your office space is also an option.

Staff: Before hiring new staff, evaluate whether you could save money by outsourcing functions or spreading the work across existing employees.

Travel: Use Skype and conference call solutions to avoid unnecessary travel to meetings. You can also opt for economy travel rather than business or first class on flights.

Even with the best preparation, businesses can encounter cash flow problems.

Talk to a member of the MGA Insurance Broker team to plan for unforeseen risks to your organisation.