Preventing the Cash Flow Crunch in SME Operations

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Small and Medium Enterprises (SME) have grown much in the last ten years due to growing development opportunities, embracing of the latest trends, and novel machinery. But, at the same time, an SME has to face many challenges due to credit instruments access or monetary support.

Cash flow management is an ongoing and persistent fight which business owners have to fight to avoid failure.

Statistic Brain, in their study in Jan 2014, revealed that the major causes of failure of small and medium businesses is cash related. These cash flow crunches are caused due to lack of pricing knowledge, no planning, lack of financing knowledge, lack of bookkeeping experience, bad practices of credit granting, insufficient borrowing practices, and insufficient inventory.

Acquire a hold on Cash Flow:

All of these pitfalls relate specifically to cash flow. Cash flow isn’t a difficult business topic, however many small-business owners don’t want to deal with it because they think it’s “all about numbers.” But, it isn’t. It’s about the health of your business.

You need to follow two primary ways to improve the cash flow in your business.

  • Income: Increase the amount of cash coming in.
  • Expenses: Decrease the amount of cash going out.

Sounds like such an easy concept, doesn’t it? Here are some easy and amazing practices for maintaining a smooth cash flow:

1) Calculation of business risk analysis and advance planning

Always keep an eye out for unexpected serious challenges and a variety of risk factors involved with running a successful business. All kinds of “what if” scenarios should be considered for risk analysis. These, in turn, become a part of your bookkeeping process of budgeting and maintaining a healthy cash-flow.

Use a spreadsheet or bookkeeping software to enter cash inflows. Simply reflect a hypothetical situation by adding or deleting inflows.

2) Make a new business bank account

The first and foremost step required for a start-up business is to have a separate bank account. Mixing your personal account will cause confusion and make the bookkeeping of the business budget troublesome.

3) Efficient monitoring of inventory

Manage inventory efficiently. Maintain a sufficient inventory of fast-moving items. Do not overstock. Avoid keeping stock of dead or slow-moving items. Analyze the items which are selling and which are not. Keep the inventory levels lean so that your working capital isn’t tied-up unproductively and unprofitable.

4) Always maintain Buffer Money

Always keep at least three months money saved in the bank for a rainy day so that you always have funds on hand to finance your business.

5) Control Cash Flow best by bookkeeping

Many business owners postpone invoicing customers and make payments at the end of the month. Keep track of your transactions on how to pay the supplier and money owed by the customer by bookkeeping. Either implement accounting software or use a simple spreadsheet.

6) Cut expenses, manage Cash outflows

Control and lessen your expenses even if you are gaining profits. Keep records by bookkeeping. Control cash flow and prevent from overflowing. The outflow of cash will destroy your business.

7) Grow cash

Maintain your currency balances in accounts that earn interest. Keep cash in accounts which pay interest at a higher rate. Stay away from long-term deposit certificates because, by doing this, you will be bound for a certain time period. Invest in certificates which are penalty free or funds which you will not need soon.

 8) Focusing on cash flow, not on profit

Agnes Cserahti has estimated that 90% of SMEs never plan their cash flow though they have profit forecasts of many years. This is one of the major reasons for failure in the early stage of business. New businesses should work with clients who are reliable and who pay quickly.


Small business owners that work on good cash management always have a profitable business as they have a lower debt and/or loan rate. This also leads business owners to be flexible and avail new opportunities with a sound peace of mind.

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