What is Working Capital Management - Advantages of Releasing and Increasing Business Cash Flow for SMEs
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Working Capital Management is an important issue for SMEs. It includes managing basic expenses, such as setting up a factory or a studio, research and development, production, and payroll. It also involves handling unexpected business cash flow needs so that SMEs can tackle various operational challenges more flexibly.
SMEs that are at the start-up stage may need to invest capital for every step of growth. Even if they receive a substantial amount of business cash inflow, after deducting expenses, they may still struggle to break even, or struggle to keep their business cash flow healthy and surging. How do we determine whether a company is in a healthy operating state? What does business cash flow mean? What are the common misconceptions about working capital management among SME owners? DBS SME Banking can offer some answers.
What is Business Cash Flow?
Just like how a human body cannot live without a consistent blood flow, a company also needs a good business cash flow to support its growth and development. Business Cash flow refers to a company’s cash inflow and outflow at a specific period of time1 . It repeats continuously and is indispensable. A healthy, growing and expanding company relies on a steady and positive business cash flow to sustain its business growth. We cannot overlook the operating business cash flow generated from a company’s daily business operations1.
As a company evolves into different developmental stages, it can record a positive or a negative business cash flow. For example, when a company invests in securities, equipment or property purchases or sells other assets, an investing business cash flow can be generated. A financing business cash flow is generated when a company pay or repays debts, equity or dividend payments1.
What is Working Capital Management?
Maintaining high-quality working capital management is crucial for ensuring a company’s solid business cash flow. Only then can there be sufficient capital to capture any growth opportunities or to keep the business afloat in times of difficulty2. For instance, a business needs to prepare extra capital for expansion during peak seasons, and it requires a certain amount of capital to maintain its operation during the off-season and when cash inflow is low. Some short-term financing solutions can help businesses manage their day-to-day expenses2, such as storage costs, purchases, rent, wages, etc.
Why Do SMEs Need to Manage Business Cash Flow?
Key Benefit 1 of Managing Business Cash Flow for SMEs: Reduce Risks of Business Failure3
SMEs can avoid being forced out of operation or even facing bankruptcy risks by actively managing their business cash flow. When a business owner knows a company’s business cash flow, in terms of expenses and revenues, inside and out, he or she will be able to identify the crux of any operating problems and the precise coming and going of money. For example, is a company often struggling to pay wages or repay debts on time due to its clients owning a significant amount of money?
Key Benefit 2 of Managing Business Cash Flow for SMEs: Save for Rainy Days3
Good business cash flow management can support SMEs to seize business opportunities when they come. For example, having sufficient funds to make bulk purchases secures discounts, thereby saving costs and boosting profits. Not to mention, the market and the economy change constantly. Does your company possess sufficient reserves and is well-prepared to cope with any unexpected events? For example, during the COVID-19 pandemic, global supply chains were under tremendous challenge and pressure. If a company had been active in managing its business cash flow prior to the pandemic, despite the sharp increase in raw material and transportation costs, it could still be more capable of mobilising its reserves to maintain its production.
Key Benefit 3 of Managing Business Cash Flow for SMEs: Better Long-Term Financial Planning3
Through managing business cash flow, companies can understand their capital health, review every expenditure, and make reasonable financial plans and budgets. This not only helps businesses consolidate their current financial strength but also offers companies a better grasp of financial risks and opportunities in the future. For example, when is a good time to expand business reach? What kind of investment should be made at different business stages? Do you have enough resources, and are you equipped with the right conditions to compete directly with your market competitors now? All these business decisions, to a certain extent, need to take business cash flow into consideration while corresponding strategies are being formulated.
Key Benefit 4 of Managing Business Cash Flow for SMEs: Pay Employees Their Wages on Time4
Every employee is like an important cog in the wheel of a business operation. Through effective business cash flow management, you can ensure sufficient cash reserves to pay employees’ wages and salaries. In the long run, it also benefits the development and training of corporate talents. Late wage payment not only causes dismay among employees, affecting their performance and the company’s operation, but it can also tarnish your company’s reputation.
Key Benefit 5 of Managing Business Cash Flow for SMEs: Sufficient Funds For Raw Materials Procurement or Service Offers4
One of the biggest challenges SMEs face when meeting order requirements and maintaining a seamless production is to ensure a stable supply of raw materials. Since the procurement planning and budgeting of an SME might differs from that of a large enterprise, SMEs need to stay more flexible when it comes to raw material procurement. Having a good business cash flow signifies better and more accurate budget planning for procurement expenses and a good understanding of whether there are sufficient resources to fulfil orders. So, when the cost of raw materials rises, the business owners would have the ability to cope with the market changes. If problems with raw material supplies cause a delay in the production process, a delayed product delivery, or even the failure to fulfil contract requirements, an SME can suffer from a bad business reputation. This can directly affect profits or lead to compensation issues.
How Can a Company Increase Business Cash Flow
Some short-term financing solutions can assist a business in its day-to-day operational expenses2. DBS SME Banking offers Working Capital Advisory, with services including5:
- Peer and industry benchmarking for working capital
- Diagnostics tools to identify gaps and offer actionable steps
- Customised advice to generate cashflow and reduce costs.
Ready to unlock and increase business cash flow for better working capital management? Click here to learn more about DBS’ SME Business Instalment Loan.
To borrow or not to borrow? Borrow only if you can repay!
Article published on: 10 November, 2023
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