Small and medium-sized enterprises (SMEs) have significantly contributed to the Singaporean economy acting as the engine of growth through employment opportunities, major sources of technological and product innovation. However, when SMEs are experiencing cash flow issues, several problems arise, such as an increase in employee dissatisfaction and a decrease in the company’s employment rate. This can be seen when the number of SME employment dropped marginally by 0.9 per cent in 2020 as against a positive growth of 3.0 per cent in 2019.  SMEs that seek temporary financial assistance face a major hurdle from the strict screening process that is employed by money lenders further hindering the progress of existing and potential SMEs due to a mismanagement of financials.

Inefficiencies in managing cash flow displace the success journey of SMEs. This article highlights some of how SMEs in Singapore can manage their cash flow more effectively that way safeguarding their path to becoming successful businesses.

Create detailed cash flow projections

In order to identify the best way to forecast your business’s cash flow, you must first understand your business objectives, your management team’s or investor’s requirements, and the availability of information in your business. Forecasting processes differ as different requirements are needed.

There are several steps to forecast your cash flow in accordance to your business requirements. These steps include:

1.  Determining your forecasting objective(s)

To ensure actionable business insights are present from a cash flow forecast, it is pivotal to determine the business objective that the forecast should support. Several examples such as:

• Short-term liquidity planning – Managing the amount of cash available on a day-to-day basis to ensure daily operations are functional
• Interest and debt reduction – Ensuring the business has a sufficient amount of cash to pay off loans and debt if necessary
• Covenant and key date visibility – Projecting cash levels during key reporting periods
• Liquidity risk management – Safeguarding a necessary amount of cash to pay off any potential liquidity risks that could arise in the future
• Growth planning – Ensuring that the business has enough working capital to help grow revenues in the future

2. Choosing your forecasting period

 Once the business objective has been chosen, businesses should look to consider how far into the future the forecast will look. Typically, there is a balancing act between the amount of information accessible and the length of the forecast. This implies that as the forecast extends further ahead, it is expected to be less comprehensive or precise. Some of the forecasting periods and what they are best suited for:

• Short-period forecasts – Short-term forecasts are typically less than 3 months. This forecast is best used for short-term liquidity planning
• Medium-period forecasts – Medium-term forecasts span from 3 months to 6 months and are useful for interest and debt reduction, liquidity risk management, and key date visibility
• Long-period forecasts – Long-term forecasting makes calculations for 12 months or more, spanning several years. These forecasts are used to assess the cash necessary to grow and to make long-term investment decisions

3. Choosing a forecasting method

There are two main categories of forecasting techniques: direct and indirect. The key distinction between them is that direct forecasting utilises real flow data, while indirect forecasting depends on estimated balance sheets and income statements.

Direct forecasting is used for short-period forecasts as it shows the cash required to fund working capital, this is done through an analysis of upcoming receipts and debtors. While indirect forecasting is used for long-period forecasts. This method shows the cash required to fund long-term growth strategies and projects. This is done via an estimation of various income statements and balance derivations. Generally speaking, direct forecasting has the greatest accuracy as it relies on proven data and numbers from a more recent period while indirect forecasting is based on estimations and projections.

Implement strict credit control

Credit control is a strategy used by businesses to increase sales of products or services through the extension of credit to potential customers. They are directly proportional to business health and prosperity ensuring business survivability in times of recession. It also ensures better financial health by effortlessly generating ideal cash flow amounts. 

Credit control and cash flow have an unbreakable relationship, each being impacted if the other is influenced. For example, a strict and well-formulated credit control system has a higher chance of the debtor repaying their promised loan amount, therefore increasing the cash flow. There are several objectives that strict credit control can fulfil such as:

• Minimising the risk to business from customers with bad financial health
• Ensuring stable cash flow for a business
• Strengthening a business’s financial capacity to address economic challenges
• Enhance business trust and credibility

Securing financing options

When your business is growing or facing short-term cash flow problems, look into alternative financing options specifically personalised to SMEs. Choosing a funding option that supports the demands and growth of your business allows you to fully optimise the usage of your funding to the benefit of your business. There are several options available that allow you to take advantage of, such as:

• Invoice financing – A lending company advances a percentage of the total amount on the invoice. After the client pays, the rest of the money is given and a fee to the lender is issued
• Startup loans – Loans from a lending company that provides a channel for new businesses without collaterals or a pre-existing track record
• Crowdfunding – Raising money through a third-party platform, works mostly for innovative and creative products that are willing to enter a market

In conclusion

The Singaporean business landscape allows SMEs to thrive and succeed. However, by meticulously forecasting cash flow projections, implementing strict credit control, and securing financing options, businesses can gain valuable insights into their future financial position and towards the growth of their business. Furthermore, regular reviews and updates to the current systems allow the business to adapt to the ever-changing market dynamics. Embracing the practice of cash flow management empowers SMEs to navigate financial complexities with confidence eventually contributing to the long-term growth and success of the business.