Minimise the Risk of Cash Flow Shortfalls
How efficiently an SME manages cash flow is often a critical factor in its chances of survival beyond the first few months of operations. In simple terms, effective cash flow management is ensuring that cash coming in (receivables) covers cash going out (payables). Where there is a shortfall then that must be bridged by a cash injection by the owner or by a line of credit from a bank. If this credit comes from a bank it can be very costly and in Qatar it can sometimes be difficult for SMEs to obtain sufficient credit from a bank.
Actions that an SME can take to minimise the risk of cash flow shortfalls include:
- Produce a cash flow forecast and monitor it regularly against actual results. It is important that an SME monitors what has been spent to date, what must be spent in the next budgeted period (e.g. salaries and rent) and what expenditure can be deferred to a later period if necessary. Analysing where income is generated and where costs are incurred also means that the owner of the SME knows which parts of the business generate most income, and hence where most effort should be concentrated, and where cost savings should be made.
- Bill customers and cash cheques received promptly.
- Know the customers. In particular it is important to know how long particular customers are likely to take to settle their bills and which customers may not pay.
- Offer incentives for customers to pay promptly. This could be done by setting terms of payment (e.g. pay within 30 days) and imposing penalties for late payment or by offering discounts for early settlement.
- Set up a credit line or know what is available before it is needed.