Managing cash flow - particularly for SMEs - Business Works
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Managing cash flow - particularly for SMEs

Simon Barker, Bartercard UK CEO The business case for keeping spending under control doesnít depend on the state of the wider economy. However, during uncertain times, when consumer confidence is low, it becomes more important than ever.

Indeed, such is the economic climate that many businesses are finding sources of working capital difficult to access and must find innovative ways to manage their cash flow. These circumstances, in particular, strengthen the business case for finding other ways to pay for goods and services such as bartering.

Cash flow

A key first step for SMEs aiming to manage their cash flow is to draw up a budget, identifying where their business may be overspending, or where it should be spending more. This process will allow companies to plan their route to where they hope to be over the next year.

The main cash management goals will be to increase and speed up the money coming in and decrease and slow down the amount leaving the business. This will often mean carrying out an action and its counterpoint. For instance, speeding up cash coming in by reducing the trade terms offered to debtors and slowing down the speed money goes out by requesting longer terms from creditors.

Money coming in can also be sped up by billing promptly and asking for deposits and money out can be slowed down by securing lower monthly repayments on long-term debts and reducing inventory. Companies facing low cash reserves can also consider tools such as invoice financing to plug the gap.

Making savings in practice

The principles of cash flow management may be straight forward, but the way business owners put these into place in practice can be a minefield. When it comes to making savings, for instance, return on investment should be the key measurement.

Were a business to find a way of pooling its purchases under one supplier and negotiating a discount, this could well be a sensible saving. However, businesses need to be very wary of making shortsighted decisions during difficult economic circumstances. A well-known example of this is slashing advertising budgets and costing the business more in lost sales than is saved through the reduction in marketing spend.

Likewise, if a company has invested a lot in CSR initiatives, itís possible the amount saved through cutting these would be less than the losses from the damage caused to the companyís brand.

Other ways to pay

When savings canít be made, bartering becomes a particularly attractive option for SMEs. Bartering allows businesses to save cash by paying with goods or services.

In the case of a business-to-business trade exchange, this means owing goods or services to other members of the trading network, rather than a direct trade. For instance, if a barbershop needs accountancy work carried out, it could pay an accountant who is also a member of the trade exchange in Ďtrade poundsí rather than hard currency. If the accountant charges 600 trade pounds for the work carried out, the barber owes haircuts to that value within the network, while the accountant can spend that amount with any other trade exchange members.

The benefit of a trade exchange over the earliest forms of bartering is that the two parties donít need to require each otherís services for a deal to take place. For instance, if the accountant were bald, £600 worth of haircuts might not appeal. However, allowing the accountant to spend trade pounds with any other member means he can pay for anything from advertising and stationery to hotel stays and meals out. For the barber, if business had been slow and the only other way to pay an accountant would have been to cut other important spending, such as advertising, the benefits of bartering are immediately apparent.

However, even if the barber could have afforded to pay in cash, there could still be a strong case for bartering, especially since almost every business has some spare capacity. For instance, if most of the barberís clients book appointments in the morning, then there might be a period during the afternoon when the barber isnít cutting hair, because no one has booked an appointment. If trade exchange members were booked in for haircuts during these slower periods of the day, the barber could still offer haircuts to the same number of cash-paying customers while covering the cost of the accountancy work that would have otherwise required a cash outlay.

Likewise, a hotel that is only busy in the summer and has a number of unoccupied rooms for much of the year could cover the cost of its advertising by offering spare rooms during quiet periods to other trade exchange members.

Essentially, while there are times when the wider economy forces companies to find ways to preserve cash, the business case for managing cash flow and budgeting sensibly is always strong, regardless of the economic circumstances.

Simon Barker is CEO of Bartercard UK. He joined Bartercard as a non-executive director in 2005, following an extensive career at various international manufacturing and service companies.

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