SMEs should focus more on their liquidity as their

businesses grow

Managing cash flow and liquidity risk is a major activity that SMEs need to focus more, especially when they are embarking on growth strategies. A greater balancing act needs to be undertaken between making sure all obligations are paid on time, doing everything to collect cash as quickly as possible, and not holding excessive cash balances. These points were emphasized and reiterated by Credit Advisory Unit (CAU),a JV unit between Evolve Maximus Pte Ltd and Dun & Bradstreet Singapore Pte Ltd. In this regard, an understanding of cash flow cycle is an important first step in managing cash flows. The basic rule in managing the cycle is that SMEs want to lengthen the disbursement cycle and shorten the receipt cycle. Controlling float times is a common way of adjusting cash flow cycle times.

CAU recommends that in order to understand the magnitude and timing of cash flows, SMEs need to plot cash flows. This leads to the use of cash flow forecasts. Cash flow forecasts help optimize the amount of cash that should be held. Cash flow forecasts also help identify when short-term financing will be required. Finally, SMEs need to be aware that cash flows are influenced by many factors, ranging from payroll to inventories. A static workforce and runaway inventories can be detrimental to cash flows. SMEs also need to be aware of the warning signs of cash flow distress, such as late vendor payments and delayed purchases.

CAU estimates there are currently around 130,000 enterprises formed in Singapore where thanks to various government and private initiatives in recent years, should see a growth rate for enterprise formation of at least 10-15% per annum in the next two years. CAU notes that there are certain risks inherent in most SMEs according to a financial and risk management study conducted recently. CAU estimates that between 60-80% of SMEs’ current asset portion of the balance sheet is mainly tied in receivables and inventories, only 5-8% in cash and the balance in other current assets. While each industry has its own cash or stockholding requirements, from the standpoint of creditors, it is imperative that the general liquidity position of their borrowers need to be assured vis-à-vis the amount that they are exposed to.

Cash is the most liquid of assets and it represents the lifeblood for growth and investment.

Therefore, managing cash flow involves several objectives:

• Accelerating cash inflows wherever possible.

• Delaying cash outflows until they come due.

• Investing surplus cash to earn a rate of return.

• Borrowing cash at the best possible terms.

• Maintaining an optimal level of cash that is neither excessive nor deficient.

In order to generate cash, CAU advises SMEs to efficiently and effectively manage the activities that provide cash. These activities include billing customers as quickly as possible, disbursing payments only when they come due, collecting cash on overdue accounts, and investing idle cash.