As a small and medium-sized enterprise (SME) in a city like Singapore with high business operation costs, maintaining a healthy cash flow is critical to survival and success. Unfortunately, unexpected cash flow surprises and mistakes can disrupt our business, derail our plans, and potentially put our company at risk. In this article, we explore common cash flow mistakes and how we can prepare for them.
- Unanticipated Expenses
Unexpected expenses such as equipment repair, legal issues, or sudden tax liabilities can emerge out of the blue, disrupting our cash flow. While it's impossible to predict every cost, having an emergency fund can be a lifesaver. Depending on your industry, we recommend to set aside 1-3% of your annual revenue as your “rainy days” pot. Depending on your business, you may also want to consider managing some of your risk by purchasing insurance policies that cover risks such as:
- Fidelity: Indemnifies loss sustained from any act of fraud or dishonesty committed by an employee;
- Public Liability: Indemnifies your liability to pay damages for injury and/or property damage arising out of your business operations.
- Work Injury Compensation: Provides statutory cover for employees against injuries due to accidents arising out of and in the course of employment. This is compulsory by the way, for all local and foreign employees who are under a contract of service or contract of apprenticeship, regardless of salary, age or citizenship.
- Lull Periods
Every industry has its peak seasons and slower periods. Retailers, for instance, may see a significant boost during festive periods, only to experience a slump thereafter. One our customers who runs a hawker stall shared that they experienced lower sales during the monsoon period because less people frequent hawker centres on rainy days! Regardless of sales, the cost of operations remains fixed. Rent and salaries (the 2 biggest operational costs for many industries) don't pause when the business slows. The lack of incoming cash can make these operational costs feel like unexpected surprises, threatening the financial stability of your business. We recommend planning for these periods by saving surplus cash during peak seasons or arranging for flexible financing options to help weather the slower periods.
- Unplanned Opportunity Costs
Opportunity costs may not directly drain cash from our businesses, but they represent lost potential earnings. These could stem from a lack of adequate staff forcing you to pass on a large order, or lack of inventory causing stock-outs. This was a big mistake I made in my early days in my first business. Proactive planning, efficient inventory management, and flexible staffing solutions can help avoid these missed opportunities. For example, if you run a cleaning services company, how about collaborating with competitors to supply each other with manpower when there is a surge of demand instead of rejecting jobs? If you have surplus manpower that is drawing a fixed salary, why not?
- Late Payments
Late payments from clients can wreak havoc on your cash flow, especially if they become a regular occurrence. Many of us operate our businesses on the assumption that customers will pay on time, but the reality can often be far from it. A well-thought-out credit control process can help us mitigate this risk. Consider incentives for early payments, enforce stricter payment terms, or use invoice financing services to maintain steady cash flow. Do note that there’s a fee to invoice financing services so you may want to either factor the cost in as part of your cost of selling your product/service or opt for methods that doesn’t cost a fee first? The method that works for me is to have a good relationship with my customers and ask if they can help to put up the invoice earlier. There is no shame asking for help. What you will realise is that people are willing to help as long as you ask. There has been research that shows that people feel happy helping others.
- Overinvestment in Growth
While growing your business is an exciting venture, overinvestment in growth can lead to financial instability. Many SMEs make significant investments in marketing, hiring, or new product development to facilitate growth. However, these investments don't always produce immediate returns, which can cause a serious cash flow crunch. It's essential to balance your ambition with financial prudence – make sure growth investments are well planned, affordable, and tracked for return on investment. In my journey of scaling my businesses, I relied on the 3-step concept of “test, measure, learn”. Allocating a big amount of resource to a new idea (especially where you do not have expertise) may cause a huge strain on your cashflow and impact the operations of your existing business.
- Changes in Market Conditions
Changes in the market, such as new competition, technological changes, or shifts in consumer behaviour, can affect our sales and, in turn, our cash flow. Regular market research and staying on top of industry trends can help us anticipate these changes and adapt accordingly. For example, Nokia lost its position as the global leader in mobile phones when smartphones were introduced to the market.
In conclusion, cash flow surprises can strike any business, at any time. The key is not to eliminate them entirely – a task that's often impossible – but to improve our business' resilience to them. This resilience starts from proactive financial planning, efficient operations, flexible strategies, and a constant awareness of the business environment. If we can master these, we will be better equipped to navigate whatever surprises come our way and continue on the path to success.