Introduction
For SMEs, sustainable growth isn’t just about increasing sales or market share—it’s about growing in a financially healthy way. Proper cash flow management provides the foundation for stability, scalability, and long-term success and is crucial in enabling SMEs to thrive in competitive markets, seize growth opportunities, and weather economic challenges.
What is involved in Cash Flow Management?
Cash flow management involves tracking, analysing, and optimising the net amount of cash being transferred into and out of a business.
Here’s what’s typically involved:
1. Cash Flow Forecasting
If forecasting is new to you or something you aren’t confident with, our Blog Why Budgets and Forecasts are different but equally important in your business will be a good place for you to start.
Cash flow forecasting helps you anticipate cash shortages (e.g., business under stress or facing insolvency) or surpluses (e.g., funds available for growth or too much cash in the business) in the:
• Short-term (i.e., weeks or months): Predicting cash needs.
• Long-term (i.e., quarters or years): Planning cash needs.
2.Monitoring Cash Inflows
Firstly forecast, then track incoming cash from:
• Sales (credit and cash).
• Loan proceeds.
• Investments
• Asset sales.
3. Controlling Cash Outflows
Firstly forecast, then manage (i.e., prioritise and/or defer) outgoing cash to:
• Rent, salaries, utilities, and other overheads.
• Supplier invoices.
• Loan repayments.
• Taxes
Cash Flow Management’s importance in achieving Sustainable Growth
Successful cash flow management delivers the following benefits:
1. Ensures Business Continuity
Cash flow is the lifeblood of any business. Without sufficient cash, even profitable companies can struggle to meet day-to-day obligations. Effective cash flow management ensures that SMEs can:
• Pay employees and suppliers on time.
• Meet all required tax payments within specified deadlines.
• Maintain inventory levels.
• Cover overhead costs like rent and utilities.
• Handle unexpected expenses.
2. Facilitates Better Decision-Making
Understanding cash inflows and outflows allows business owners to make informed financial decisions. With proper forecasting, SMEs can:
• Plan for seasonal fluctuations.
• Take advantage of early payment discounts or strategic investment opportunities.
• Avoid sometimes hefty penalties and additional interest costs arising from late tax payments.
• Avoid overextending themselves with new purchases or investments.
3. Improves Creditworthiness
Lenders and investors assess a company’s ability to manage its finances when considering credit or investment. SMEs with positive and predictable cash flow:
• Can build strong relationships with suppliers.
• Are more likely to secure loans and favourable credit terms.
• Gain investor confidence.
4. Helps Navigate Economic Uncertainty
During downturns or crises, a healthy cash reserve can be the difference between survival and closure. SMEs that prioritise cash flow management are more resilient and adaptable.
5. Supports Sustainable Growth
Growth, one of the hardest things to manage, often requires upfront investment (e.g., hiring staff, buying equipment, expanding operations). If growth is not aligned with available cash, SMEs may face liquidity problems. Strong cash flow management:
• Aligns growth initiatives with financial capacity.
• Reduces dependency on external financing.
• Minimises the risk of overtrading (growing faster than cash allows).
Key strategies for successful Cash Flow Management
In addition to cash flow forecasting, which is a given, managing your business’ Working Capital (i.e., Current Assets – Current Liabilities) is the key to successful cash flow management in the short-medium term.
Positive working capital means the company can meet short-term obligations, whereas negative working capital might signal liquidity (i.e., insufficient cash) problems such as in May each year when Provisional Tax, GST and FBT payments are required within the month.
If your business is continually dealing with poor liquidity, this will over time have a significant impact on you and/or your staff which could result in serious health and wellbeing issues, staff resignations, irreparable damage to supplier relationships, etc. Avoid dealing with liquidity issues at your peril!
Our Blog Working Capital Management introduces key Working Capital measures and provides a high level “generalised” guideline you can use as a starting point to determine the right number for your business that will depend on the industry you are operating in and the trading conditions in the current environment.
Key strategies to increase your business’ Working Capital (i.e., adding to Current Assets and/or reducing Current Liabilities) which you and/or your staff need to recognise the importance of and commit to implementing include:
1. Improving the management and collection of your business’ accounts receivable or debtors’ balances:
• Invoice promptly after providing goods or services
› The quicker you invoice, the sooner you receive payment.
• Follow up on late payments as soon as they become overdue.
› Engage proactively with those customers who are not paying their debts on time to understand their reasons for delayed payments and agree expectations on the amount and timing of required payments.
› Measure the Debtors Days outstanding and focus your efforts on reducing this.
2. Analysing and optimising inventory management to reduce overstocking and the likelihood that inventory will need to be written off.
• Understand the optimal level of inventory to meet current and forecast demand.
• Manage inventory (i.e., current and future supplier orders, liquidate slow moving stock items) efficiently.
3. Analysing and reducing expenses which in turn reduces accounts payable or creditors balances:
• Eliminate unnecessary costs.
› Keep a detailed record of all expenses to help identify unnecessary spending and provide insights into where you can cut costs.
• Negotiate better trading terms with suppliers and creditors.
› This might include extended payment deadlines or discounts for early payments.
Other key strategies, beyond working capital management, for the medium to long term achievement of Sustainable Growth include:
1. Build a cash reserve
• Maintain a buffer for emergencies and/or to take advantage of opportunities.
2. Debtor Factoring
• If the above actions to improve the management and collection of your business’ accounts receivable or debtors’ balances aren’t delivering the required result, consider debtor factoring which is selling the business’ unpaid customer invoices to a third party (a factor) at a discount which is typically 1–5% of the invoice value with additional fees that may apply if invoices are unpaid after a set time.
3. Tax pooling
• Tax pooling is a system used to help businesses manage their provisional tax obligations more flexibly and efficiently.
• Your business can pay funds into the tax pool of an Inland Revenue-approved intermediary for future use when it has surplus funds and/or buy funds from the tax pool if it doesn’t have the cash to meet the required payment deadlines.
4. Take on long-term debt
• This involves increasing current assets by adding to your business’ available cash without overly increasing current liabilities) or refinancing short-term debt as longer-term debt.
