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Being in consulting over the years and covering a wide range of industries across states, we frequently encounter one common question: “We face cash flow issues often and are dependent on external funding or overdraft facilities (OD), which affect our profits and timely expansion plans.”
Cash flow issues are one of the most common challenges faced by SMEs. These problems can hinder operations, delay growth, and create dependence on external funding sources like overdrafts or loans. The good news? Effective strategies can help businesses overcome these hurdles and improve financial stability. Drawing on our consulting experience across various industries, we’ll explore proven methods to resolve cash flow issues
1.Create a Cash Flow Forecast
Anticipating future inflows and outflows allows businesses to prepare for periods of low liquidity. A detailed forecast helps align expenses with expected revenues, avoiding unexpected shortfalls. Forecasting involves breaking down income and expenses on a monthly, weekly, or even daily basis. Software tools or detailed spreadsheets can help.
2.Negotiate Payment Terms
Adjusting payment terms with both suppliers and customers can bridge cash flow gaps. Extended payment terms with suppliers and shorter terms for receivables ensure liquidity. This requires open communication and leveraging strong relationships.
3.Monitor Outstanding Payments
Outstanding payments often tie up significant funds. Proactively following up on receivables can improve cash flow. This includes setting reminders, automating follow-ups, and building a systematic review process for aging invoices.
One of our clients in the trading industry faced persistent cash flow issues. They depended on external debt funds and OD facilities to carry out marketing campaigns, even though they had large outstanding funds in the market. This dependence negatively impacted their profitability.
Our Solution:
– Introduced measurable targets to recover outstanding payments
– Set up review systems and monitored cash inflows and outflows.
– We implemented a structured plan for their marketing campaigns.
Outcome: Within a few months, the client succeeded in retrieving significant outstanding funds, which reduced their reliance on debt financing. Through planned fund allocation, they were able to execute marketing campaigns without external borrowing, leading to increased profitability.
4.Cut Unnecessary Costs
Reviewing and reducing non-essential expenses can free up funds for critical operations. This requires analysing recurring costs and identifying areas where savings can be made without compromising quality or operations.
5.Allocate Monthly Budgets for Seasonal Expenses
Seasonal purchases and campaigns often strain cash flow. Allocating small monthly proportions for these needs can reduce the need for external funding. This strategy ensures that funds are available when needed without impacting routine operations.
A retail client consistently relied on external funding for purchasing inventory and marketing campaigns for seasonal sales. This habit resulted in higher costs due to interest on loans and reduced their overall profit margins.
Our Solution:
– We designed a fund allocation strategy, setting aside small proportions from their monthly revenues.
– Created a financial buffer specifically for seasonal purchases and marketing campaigns.
Outcome: The client successfully managed seasonal purchases and marketing without resorting to external funding. This improved their profit margins and reduced financial stress.
6. Implement strategy for Cash Flow Monitoring
Using modern tools to track and manage cash flows provides real-time insights, enabling quicker decision-making. Many cloud-based accounting and financial management platforms offer dashboards, alerts, and analytics to optimize cash management.
Cash flow management is crucial for the survival and growth of SMEs. As seen in these examples, proactive planning, effective cost management, and leveraging technology can significantly improve financial health.
At Leap Point Advisory, we have first-hand experience in helping businesses resolve cash flow issues through tailored strategies and practical implementations. As trusted business consultants in Kochi and Kerala, we are committed to enabling SMEs to thrive in a competitive market.
Ready to solve your cash flow challenges? Whether you need to reduce dependency on external funding or improve profitability. Let’s create a strategy that works for your business. Reach out to Leappoint Advisory today!