Five Tips on How SMBs Can Manage Their Cash Flow Better

By Pushkar Mukewar, Founder-CEO, Drip Capital 

Strong cash flows form the bedrock of resilient small businesses, enabling them to seize new growth opportunities, fulfill orders, and meet rising demands. Achieving a healthy balance of inflow and outflow is a pain point for SMBs as they possess limited funds and aren’t very financially literate.

In fact, most small businesses worldwide (61%) struggle financially, and 32% cannot either pay their vendors/employees or repay loans due to cash flow issues. Another study revealed that small business owners in the United States suffer an average annual loss of USD 43,394 by forgoing projects or sales due to insufficient cash flow.

While mastering effective cash flow management is a skill that evolves with time, there exist five valuable strategies that small and medium-sized business (SMB) traders can implement to enhance their cash flow and propel business growth.

1. Maintain a Cash Reserve: 

Inadequate financial management strategies often plague SMBs, resulting in poor decision-making and early depletion of funds. However, in today’s unpredictable trade environment, it is crucial for SMBs to establish a cash reserve to mitigate unexpected expenses such as delayed payments, canceled orders, and escalating shipping or raw material costs.

Seasonal businesses should consider creating a separate fund specifically for peak revenue months to navigate through lean periods successfully. With sufficient funds, SMBs can make strategic investments in building a resilient supply chain, enabling them to operate seamlessly even during challenging times.

 2. Financial Projections: 

A lack of comprehension and effective cash flow management is a common cause of business failure. As steady cash flow indicates a company’s positive financial health, monitoring the inflows and outflows becomes a vital aspect of business operations.

To address this, SMBs can consider investing in accounting software and cash forecasting tools. These tools allow businesses to track their revenue and anticipate expenses more accurately.

It is also essential for SMBs to regularly review their budget and provide financial reporting to relevant stakeholders, ensuring timely updates to the business strategy as needed. Additionally, these tools facilitate efficient record-keeping of the company’s financial metrics, contributing to streamlined financial management.

3. Select the Right Financial Partner/Product:

Traditional financial institutions predominantly offer business loans that require collateral and strong cash flows, primarily catering to large corporations rather than small businesses.

In such circumstances, SMBs should explore alternative lending options. Numerous alternative lenders provide customized finance solutions based on receivables (factoring/bill discounting), payables (buyer financing), and inventory financing. These options inject working capital back into the business with minimal effort, offering SMBs the flexibility they need to prosper.

4. Optimize Processes 

To thrive in today’s digital landscape, SMBs must leverage digital tools and invest in solutions that optimize their processes and provide complete visibility across their supply chain. According to a report by Deloitte, SMBs that embrace digitalization are more likely to achieve revenue growth compared to their less digital-savvy counterparts.

Additionally, SMBs can explore the benefits of robotics and automation tools, which enable the development of a real-time quality assurance and inspection system, leading to improved product quality. By harnessing the power of artificial intelligence (AI) and advanced analytics (AA), small businesses can gain valuable insights into consumer behavior and preferences, empowering them to enhance their marketing efforts.

The digital transformation of processes not only saves costs associated with manual labor but also optimizes expenses, boosts operational efficiency, and provides accurate assessments of the business’s overall health. Embracing digital tools and technologies is a strategic move that positions SMBs for success in the modern business landscape.

5. Implementing Cost-Effective and Healthy Trade Practices: 

The recent supply chain crisis has highlighted the importance of resilient and adaptable global supply chains. Consequently, SMBs should reassess their sourcing networks and consider diversifying them to mitigate geopolitical or socioeconomic risks.

In the long term, SMBs can explore the possibility of nearshoring or onshoring after conducting a thorough cost-benefit analysis. However, it is crucial to evaluate whether the expenses associated with the new setup outweigh the savings regarding import tariffs, customs fees, shipment costs, and other factors. Careful consideration should be given to ensure a balanced and advantageous approach.