Connecting the dots between working capital and cash flow management

In Singapore, barriers to financing have resulted in an unmet funding gap for SMEs worth as much as $20b.

Gaining access to working capital is a big challenge for a majority of the SMEs I interact with in my job. Often, the businesses do not qualify for the full loan quantum as a result of outdated financial reports, or they simply do not meet the credit criteria.

It’s important to keep in mind that small businesses don’t just seek out money to plug gaps. Often they seek out capital with the intention of scaling an already successful business that has the potential to be bigger and better. Aside from growth and expansion, business innovation also relies on having the money to support the execution of new ideas.

So how should small businesses get the money they need to scale up or innovate? The key is by connecting the dots between capital and cash flow management.

Maintaining accounts for steady cash flow
Cash flow management is the process of tracking how much money goes in and comes out of the business. Whilst that sounds simple enough, it is easily neglected. Business owners who are not adept with accounting processes may also find it challenging to understand which transactions they need to record such as sales, supplier payments and non-recurring costs.

To avoid the consequences of prolonged cash shortage, business owners have to make proper cash flow management a priority. It starts with recording all the money coming in and out of the account in a cash flow statement. If a sale is made on credit, it doesn’t go into the cash flow statement until payment is received. In other words, invoices and receivables do not count towards cash inflow, only the cash received does.

The way a business’ cash flow is managed has an outsized impact on the business’ eligibility for a bank loan or funding from an investor because both rely on the SME’s financial records when making their decision. If confident that the business has a healthy cash flow that is being managed wisely, they are more likely to decide favourably.

Make maintenance easier with technology
Good cash flow management doesn’t have to be difficult or time consuming. Apart from diligently recording your cash flow every week, you can also leverage technology to optimise the process.

Businesses do this by digitising the accounting process and taking advantage of application programming interfaces (APIs) to integrate apps that can perform financial analysis, business reporting, forecasting and present them beautifully on a simple dashboard for easy interpretation.

Technology can also help to tackle another big problem that plagues small businesses -- late payments. According to our recent study on late payments, nine out of ten small businesses in Singapore report having clients that do not pay on time.

In fact, in Singapore, a total of $4.146b of late payments is owed to Singapore SMEs last year. This is a significant amount of capital that could be reinvested into the business if paid on time. SMEs can tap onto technology to automate a large part of their invoicing and payment reminders to speed up the time it takes to get paid.

Cloud accounting platforms are also enabling small business owners to easily share accurate and up-to-date financial information with banks during the loan application process. This will facilitate faster and more accurate credit assessment to provide working capital to the business during periods of economic downturn, poor cash flow or simply for business expansion.

Not all money is created equal
Whether relying on grants or working capital, it’s not just about taking money. Wise entrepreneurs know that smart money -- investors who bring to the table their experience, business acumen and connections on top of their money -- is the best kind of money to seek out.

It may be tempting for a cash-strapped small business or startup to accept the first offer of funding. Yet, there’s actually a lot on the line, making it so important for a startup to be discriminating when selecting an investment partner as an incompatible relationship can lead to longer term problems for the business. On the flip side, a partner with complementary strengths and share the same vision can help to boost business.

Doing so minimises the risk of clashing on business decisions. It also means that both parties can tap on each other’s strengths as they work towards the same goal.