Impact on cashflow of SMEs during pandemic and ways to overcome.
Never take your eyes off the cashflow, because it is the lifeblood of business.
Maintaining a healthy cash-flow is extremely important to run a business smoothly and efficiently. In such uncertain times of growing pandemic situation, we need to focus more on improving the cash-flow in SMEs. In this article, I would try to describe 7 effective ways to maintain and enhance great cash-flow.
1. Take rent, instead of buying for your SME.
When you take on rent for your business use, then you pay small amounts on a monthly basis. This helps to keep the debt to profit ratio in a healthy state. If you buy anything, then certainly you would have to initially invest a lot of amount into it, then your debt may rise if you don’t earn significant profit in the upcoming business cycles. So, in taking up rent, its significantly less riskier than buying anything. Apart from this, when you buy something, may be you would end up paying property tax or corporate Asset tax, on the other hand, while you are using something on rent, you will be exempted from paying taxes, because lease payments are a business expense, and thereby can be written off on your taxes.
2. Offer discounts for those who pay early to you
This is a very effective way to maintain good cash flow in SMEs. If the customer gets attracted to better offers while he clears his dues earlier than expected, then it’s a win -win situation. Both the parties are at gain.
3. Conduct a credit check for customers whose payment mode is not cash–
So this is very much important for those customers, who takes credit from you. You need to check their credit score before lending them the product. If the credit score is not up-to the mark, then be sire, there is a high chance that he won’t be paying you up within the permissible deadline.
4. Try to create a buyer’s association for your SME to get discounted price–
So, almost all the suppliers will offer a discounted price, if you order your supplies in bulk. Then, you need to find more guys, who are ready to purchase the same category products like you, so that, you can place bulk orders each time with the suppliers. You can share the discounted price with your peer buyers group. This helps you to pay the suppliers less, and hence in-turn raises your revenue of the company. So cash-flow for SME is impacted positively.
4. Improve your inventory–
This is very much necessary to have a healthy cashflow in SMEs. You need to get rid of the products which are no more in demand, and get rid of all such suppliers. No point in getting those things supplied to your warehouse where you won’t be able to clear off the stock to the buyers. In this particular scenario, we have to think rationally and not emotionally. Unnecessarily putting a lot of money to the things less in demand, will raise your debts and impact the cash flow in an adverse manner.
5. Have a provision of late payment fees from clients who regularly default the payments–
So, out of 10 clients let’s say, there would be 1 or 2 people, who would regularly default the payments and they are reluctant to change this habit. In such situation, the best way to save the cashflow is to introduce a late payment system. It can ensure that there would be a disciplined way of transaction between the supplier and the buyer. This would help in dealing with the cashflow crisis of SME, if arises.
6. Use electronic payment systems for better cashflow management –
Last but not the least, this point can effectively impact your cashflow with the clients. Using electronic mode of payment can help in a lot of ways, including better time management, better efficiency and better handling of money. Ever since the technology has evolved, the cashflow management process an SME has become very easy and smooth. Also, we can say that, using electronic media, will reduce the hectic process of handling accounts into a process that could be handled by anyone, anywhere. There are a lot of start ups right now in India, who are helping the small and medium scale businesses to get digitize themselves for the holistic betterment of everyone, the buyer, the supplier and the clients. One such example is TranZact, which has helped over 5000 SMEs to manage a healthy cashflow.
Apart from this, there are a lot of other ways, which we can implement just to ensure a better cashflow management. For instance, you can use, current account with high interest rates, to increase the cashflow. Check with the current rates of interest in various banks, to choose the best among them. Also, you can negotiate with the suppliers to gain a reduced price, and get discounts, the same thing which you would offer your clients when they tend to pay you early. On a final note, I would like to suggest that review and update your business plans on a regular basis so as to ensure that the trends are checked before the profits and cashflow are impacted negatively.With this, signing off, stay tuned for more such articles.