How SMEs Can Improve Their Cash Flow with Better Accounting Practices
Nov 26, 2024
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Good accounting practices can improve Cash Flow? This was one of the doubts I had during a conversation with a Finance Director from an MNC during my career in the early days. As we all know, cash flow is the lifeblood of any business, especially for small and medium-sized enterprises (SMEs) in Singapore. Without sufficient cash flow, even the most profitable companies can face difficulties meeting their obligations, such as paying suppliers, staff, and taxes. That is why you will often hear people mention phrases such as "need some cash to tide over" or "周转不灵 (cash flow problem in Mandarin)".
In truth, many SMEs need help with cash flow management due to inefficient accounting practices or a lack of financial expertise. Fortunately, improving accounting practices can significantly improve cash flow.
According to a 2023 study by Xero, 83% of SMEs in Singapore have experienced some cash flow issues in the past 12 months. This is further backed by an article released by The Straits Times in 2022 suggesting that almost 6 in 10 companies in Singapore only have cash flow to sustain the business for the next 6 months. Considering the prevalence of this problem, we would like to discuss how SMEs can drastically improve their cash flow through the implementation of the proper accounting strategies:
1. Implement Accurate and Timely Invoicing
One of the most effective ways to improve cash flow is ensuring that invoicing is done accurately and promptly. Late or incorrect invoices can cause payment delays, leading to cash flow problems. By implementing a comprehensive invoicing system, SMEs can ensure that all invoices are sent out on time and contain accurate details of the goods or services provided.
In Singapore, late payments have been a longstanding issue for businesses. A 2020 study by the Singapore Business Federation revealed that over 45% of SMEs reported experiencing late payments from customers, causing significant cash flow issues.
Tip:
Set clear payment terms with clients (e.g., 30 days) and stick to them.
Offer discounts for early payments or impose penalties for late payments to encourage timely settlements.
Consider integrating invoicing systems with accounting software to automate invoicing and minimize errors.
2. Monitor Accounts Receivable Carefully
Outstanding invoices, or accounts receivable, can tie up valuable cash. SMEs should regularly monitor accounts receivable to ensure payments are being made on time. A well-organized system that tracks due dates and payment statuses can help businesses spot overdue invoices early and follow up promptly.
Regular monitoring can be transformative for cash flow. According to a 2023 survey by Xero, businesses that proactively manage their accounts receivable see 23% faster payments, directly improving cash flow.
Tip: Use accounting software that tracks outstanding payments and automatically sends client reminders. Alternatively, consider outsourcing to a reputable firm to manage your accounts receivable to ensure prompt collectability and healthy turnovers.
3. Optimize Inventory Management
Carrying too much inventory can drain cash reserves, while insufficient inventory can lead to missed sales opportunities. Efficient inventory management ensures that a business maintains the right amount of stock to meet customer demand without overcommitting capital to unsold goods.
Tip: Use accounting software or inventory management tools to track stock levels in real-time, and adjust your purchasing habits to avoid tying up excess capital in inventory. Automating inventory processes can reduce waste and improve cash flow.
4. Negotiate Payment Terms with Suppliers
Cash flow doesn't only depend on how quickly you receive money from customers, but also how long you take to pay your suppliers. SMEs should negotiate better payment terms with suppliers, such as extending payment deadlines or securing discounts for early payments.
Tip: Establish strong relationships with your suppliers and aim to negotiate terms that align with your cash flow cycle. For example, consider extending payment terms from 30 to 45 or 60 days to better align with your receivables.
5. Track Expenses Regularly
Poor expense management is a common cause of cash flow issues. Keeping track of every dollar spent is crucial for SMEs. Regularly reviewing business expenses and identifying unnecessary or excessive spending can free up cash for more critical purposes, such as paying bills or investing in growth.
Tip: By working together with the accounting team, you may request expense tracking reports or expense analysis to provide you with greater information and clarity on key expenses. This will allow business owners to make more informed spending decisions. Nevertheless, you may engage an external consultant or use accounting tools to provide useful advice and recommendations for expense management.
6. Create a Cash Flow Forecast
A common practice for larger companies, having a cash flow forecast will allow you to plan and avoid surprises. By projecting your expected cash inflows and outflows over the coming months, you can better prepare for periods of low cash flow and take necessary actions to address potential shortfalls.
Tip: Regularly update your cash flow forecast to reflect changes in the business environment, customer payments, or planned expenditures. This proactive approach can help you avoid cash shortages and adjust before issues arise.
7. Outsource Accounting Services
Many SMEs lack the expertise or time to manage their accounting processes effectively. Outsourcing accounting functions to professional accounting firms can help businesses streamline their financial operations and improve cash flow management. By entrusting accounting tasks to experts, SMEs can focus on growing their business while ensuring that their financial records are accurate and up to date. Most accounting firms will also adopt accounting software, a highly efficient tool to manage and improve cash flow.
A report from the Singapore Business Federation revealed that 45% of SMEs who outsourced accounting services experienced faster payment cycles, and 30% reduced their operational costs.
Tip: Hiring an outsourced accounting service can reduce overhead costs and increase efficiency by giving you access to specialized financial expertise. These professionals can assist with cash flow forecasting, financial reporting, and other critical accounting functions.
Conclusion
Improving cash flow is essential for the long-term success of any SME. By adopting better accounting practices, SMEs can reduce the risk of cash flow problems and ensure they have the financial resources to meet their obligations and invest in growth opportunities. Whether it's through timely invoicing, efficient expense tracking, or outsourcing accounting functions, businesses can take several practical steps to improve their cash flow and strengthen their financial position.
OakTree Accounting and Corporate Solutions offers a one-stop business solution for SMEs. If you're an SME looking for expert accounting support to enhance your cash flow management, our team of professionals is here to help. Get in touch today to learn how our outsourced accounting services can optimize your financial operations and improve your cash flow.
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DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily represent the views and opinions of any individuals or organizations with which the author may be affiliated, either in a professional or personal capacity, unless explicitly stated.
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