5 Ways to Improve Your SME’s Cash Management Approach This 2024

Improve your SME's cash management in 2024: forecast cash flow, explore banking solutions, build reserves, negotiate payment terms, and cut unnecessary expenses

As the owner of a small- or medium-sized enterprise (SME), you may be looking forward to hitting new goals and maintaining your business’s financial stability with every year that passes. Being able to grow and continue your business’s operations throughout the year is a pretty good sign that you’re thriving in your industry.

All the same, however, economic uncertainties and financial problems can happen when you least expect them. If you don’t have enough resources to recover from these challenges, you might struggle to get your business back on its feet. That’s where your cash resources, and ultimately your cash management approach, come in.

The right cash management approach will do a lot to help you mitigate various financial risks while allowing you to stay on course with regard to your business’s goals. It should involve a good mix of time-tested cash management practices that are typical of small businesses in any industry and some contemporary business technology for banking, accounting, and finance.

To that end, below are some sound cash management strategies that are specifically tailored for SMEs. These should help you keep your business financially secure this 2024.

1) Create a Good Cash Flow Forecast

A cash flow forecast will serve as a road map for your cash management, providing you with insights into your expected income and expenditures over a specific period. It will help you anticipate potential cash shortages or surpluses, thus allowing you to make the most responsive decisions to optimize your SME’s cash flow and drive up your business growth.
Start by analyzing your business’s historical financial data to identify persisting trends and patterns in your cash flow. Look at previous months or years to understand any seasonal fluctuations you experience, payment cycles your business typically follows, and any irregularities that may impact your future cash flow.

You’ll be better equipped to estimate future sales and revenue based on historical data, market trends, and any upcoming business initiatives. Consider, too, factors like market demand, sales pipelines, and potential changes in your pricing or product offerings.

Recognize the timing of your cash inflows and outflows to ensure accuracy in the forecast. Keep in mind when payments from customers are expected or to be received, and when bills, salaries, and other obligations are due.

Finally, review and revise the forecast on a monthly or quarterly basis to reflect your actual performance and any changes in your circumstances. A cash flow forecast is not meant to be a one-time exercise, but rather, a dynamic tool that requires regular updates and adjustments.

2) Explore New SME Business Banking Solutions

The latest business banking solutions can offer you a wider range of tools and resources than ever before, all designed to streamline your cash flow processes and improve your overall efficiency. Some solutions are even tailored to meet the specific needs of SMEs.

For instance, the Philippines’ Maya Business offers a powerful suite of small business banking features that can help entrepreneurs manage their finances and even optimize their payment processes online. The Maya Business Deposit product, for instance, is a digital bank account that lets users do free transfers via PesoNet and InstaPay. It also allows users to pay multiple suppliers in one go, making the payment process hassle-free. A better small business banking solution will enable your SME to save more and earn more with frequent use.

3) Build a Cash Reserve

A dedicated cash reserve will provide you a buffer against cash flow fluctuations and emergencies while also allowing you to expend some of your resources on growth opportunities. Your cash reserve will also enhance your business’s financial stability, ensuring that you’re positioned for long-term success in an economy where fluctuations can’t be taken for granted.

To build a solid cash reserve, you must first determine how much cash you want to save. This will help you establish a target amount and set clear goals and objectives for your financial planning. You can base your decision on factors such as your business size, your industry, and your risk tolerance. Make sure that the targets are achievable and that they align with your long-term financial objectives.

Once you have a target amount, prioritize allocating a portion of your profits to your reserve fund. Regularly transferring funds into a dedicated business savings account or cash reserve fund will prove a disciplined approach to building your cash revenue.

4) Negotiate Your Payment Terms with Suppliers

You should also think about how to achieve more favorable payment terms with your suppliers so that you can extend your payment timelines, improve your cash flow predictability, and preserve your (perhaps limited) working capital. To do this, you should first review your existing payment terms with your suppliers so that you can get a better understanding of the current payment schedule, the discounts they offer, and any penalties for late payments. During this step, identify opportunities for improvement based on your cash flow needs and negotiating leverage.

Next, initiate conversations with your suppliers to discuss your payment terms and explore potential adjustments. Be transparent about your business’s financial situation and cash flow constraints, emphasizing the importance of mutually beneficial terms.

You may also present alternative payment terms that align with your cash flow objectives while providing value to the supplier. Consider options such as extending your payment deadlines, negotiating early payment discounts, or implementing installment plans to spread out payments over time. In addition, look for technologies that can help you compare and analyze supplier costs and clue you in on which suppliers offer your business the best value.

Engage in constructive negotiations with your suppliers to reach a mutually acceptable agreement based on your revised payment terms. Be prepared to compromise and find solutions that balance your cash flow needs with the supplier’s requirements and preferences.

If an agreement is reached, formalize your negotiated payment terms in writing through a revised purchase agreement or contract addendum. Clearly outline the terms and conditions agreed upon, including payment deadlines, discount terms, and any other relevant details.

5) Identify and Cut Any Unnecessary Expenditures

Inefficient spending is one of the fastest ways to drain your cash reserves and hinder your business growth. You’ll want to engage in the constant process of identifying and eliminating any unnecessary expenditures if you want to optimize your business’s cash flow and improve your financial performance.

Conduct a cost audit by reviewing all your business’s expenses, including fixed costs, variable expenses, and discretionary spending. This way, you can identify areas where the most savings can be realized. You should also evaluate overhead expenses such as rent, utilities, insurance, and office supplies. Doing so can help you pinpoint opportunities for optimization, for example implementing energy-efficient practices or downsizing the office space,

Lastly, consider automating repetitive tasks such as invoicing, payment processing, and expense tracking. Automation where applicable can help you streamline your business processes and workflows while eliminating inefficiencies and reducing operational costs.

Good cash management will be worth its weight in gold for your SME, particularly for the resilience and flexibility it will afford your business in unpredictable times. The strategies outlined above should help you improve your current cash management approach and make your SME much smarter with its money as the years roll by.