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3 cash management pitfalls SMEs should be aware of
Proper cash flow management is integral for all businesses, but even more so for SMEs. According to a survey carried out by the Malaysian credit reporting agency CTOS, SMEs ranked cash flow issues as their second-largest concern1. The Ministry of Finance also found that because of inadequate cash flow management, over 70 per cent of SMEs’ financing needs were either sourced internally or from personal savings2. This can make businesses more vulnerable to changes in the business environment.
In this article, we will be listing out three cash management pitfalls that SMEs should be aware of.
#1: Be cautious when forecasting growth
There is a common disclaimer found in the investment world – past performance is no guarantee of future results. SMEs need to be cautious about being too optimistic when forecasting future growth, as this could lead to overspending on things like staff size, office space, inventory or other equipment to meet demand based on growth forecasts.
This spending would lead to higher cash outflows, which businesses may find difficulty in covering if the anticipated demand is lower than what was forecasted at the planning stage. When it comes to cash management, it is better to err on the side of being too conservative with growth projections.
Tip: When planning for growth, remember the mantra that past performance is no guarantee of future results. Err on the side of being more conservative in your forecasts. Be more conservative in your forecasts.
#2: Avoid spending too much on acquiring customers
SMEs need to make sure they are paying attention to how much they are spending on acquiring customers, as this will increase top line revenue at the expense of bottom line profits and cash flows. One good way to do this is by comparing their customer acquisition cost with the estimated lifetime revenue per customer.
For instance, if a customer is estimated to generate an average of RM1,000 to the business over their lifetime, then spending RM500 to get each new customer (e.g. through marketing spend), might be a worthwhile expense. But if the customer is expected to generate an average of RM500, then spending RM500 to acquire each new customer may not be worthwhile.
Tip: Ensure you do not overspend on acquiring customers by comparing such costs with customer lifetime value.
#3: Ensure an adequate cash buffer
In personal finance, the general recommendation is that people should maintain an emergency fund of at least three to six months. This should be applied for businesses as well. A cash reserve that can cover all business expenses for three months or more will help businesses get through any unexpected downturns. Furthermore, you’ll want to earn interest on your cash reserve, so don’t forget to put that idle cash to work using an interest bearing account (with no lock-in periods to preserve liquidity and transaction fee waivers) such as UOB’s BizCA+ account.
The argument against keeping such a substantial cash reserve is that it is inefficient – the cash could be put to more productive use. While that is true, being too focused on efficiency such that keeping sufficient cash reserves are neglected can expose businesses to greater downside risk, as demonstrated by the COVID-19 pandemic and the subsequent movement control order (MCO) in March and April 2020.
Tip: Recent events have shown just how crucial having a cash buffer is to protect against the downside risk.
Avoid the mistake of discounting the value of ‘small wins’
While keeping the ‘big picture’ of cash management in mind and learning the lessons above are crucial, not paying attention to the ‘small wins’ is also a mistake SMEs should avoid. For instance, paying seemingly small transaction fees adds up when you must do dozens of them each month. Similarly, not keeping your business’ idle cash in an interest-bearing account will also result in substantial opportunity costs in lost interest over time.
That’s why we developed BizCA+, to help businesses capture all these ‘small wins’ so they can compound into big wins. Along with attractive interest rates with no lock-in period, BizCA+ account holders can perform unlimited complimentary transactions via UOB Infinity for Interbank GIRO, DuitNow, and RENTAS.
To learn more about how UOB BizCA+ can help you with your cash management needs, contact us today.
UOB BizCA+ is protected by PIDM up to RM250,000 for each depositor. UOBM is a member of PIDM.
