Boosting growth with effective cash flow management

POOR cash flow management continues to be a problem especially among small and medium-sized enterprises (SMEs) in Singapore. The slow economic growth of past years, increased delayed payments by customers and currency volatility have added to their woes, and are taking a toll on the management of cash flow.

According to the 2016 American Express CFO Future-Proofing Survey, tightening cash flow was identified as the biggest business challenge and risk for SMEs, together with the rising costs of doing business. In fact, the chief financial officers (CFOs) indicated that improving cash flow management was the top business priority for the next 12 months.

This marks a change from the 2015 survey, where CFOs cited changing economic conditions posed the biggest threat, followed by a tighter labour pool and government regulations.

Geoff Begg, Senior Vice President, Global Commercial Payments APAC, American Express: "Cash flow management is at the top of mind for business leaders and rightfully so. Getting to a position of having a healthy cash flow means businesses can operate strategically and proactively instead of reactively. It allows them to reinvest in new areas such as research and development, better technology and training employees."

Positive cash flow enables reinvestment for growth

Putting in place the right processes to achieve a healthy cash flow takes time, but SMEs that plan ahead with this in mind will be in a much better position to reduce financing costs and to reinvest into the business. In a competitive business climate, it can be the difference between a company's success or failure.

For Castlery, a local furniture online store, maintaining good cash flow has enabled the company to reinvest into assets such as technology to spur growth.

In 2015, the company made the decision to invest in its own enterprise resource planning (ERP) system that is integrated with its financial accounts. The ERP system allows the company to manage their procurement operations effectively and send accurate forecasting data from production to marketing to sales to its financial models.

"With the ERP, the leadership team is able to see all important financial information on their dashboards. This visibility keeps them well-informed on how the business is performing daily and gives us the agility to make changes when needed," said Castlery's Chief Operating Officer, Travers Tan.

"It's important for us to reinvest our excess cash flow in software and it's been our constant quest to make the ERP better. The next step will be for the system to support more complex functions when we expand regionally."

Chew Mok Lee, Assistant Chief Executive, Capabilities & Partnership Group, Spring Singapore concurred on the need for technology to strengthen financial management capabilities.

Implementing efficient IT systems to track and manage accounts receivables, accounts payables and inventory enable companies to identify and address key areas of gaps in their working capital cycles, such as long inventory periods, she says.

Freeing Up Lines of Credit

Positive cash flow provides businesses with the flexibility to invest in their long-term growth, especially as the economy improves. Having available cash at hand allows businesses to reinvest in growth opportunities such as improving infrastructure, developing employees and investing in new technologies.

American Express' Mr Begg says: "One way businesses can get to a positive cash flow position is to free up their lines of credit. Often, it can be tempting for firms to use their main line of credit to manage cash flow when they should be using it to capitalise on growth opportunities instead. They can do this easily by making simple changes."

For example, a third party payment provider can pay suppliers on a company's behalf and not require payment for up to 58 days.

Ms Chew concludes that challenges in managing cash flow are often due to a lack of financial management know-how or tools, which have a significant impact on business.

She advised: "Cash flow has significant impact on business resilience, sustainability and growth potential. Profitable companies can still go under if their cash flow is not well managed which may result in these companies being unable to meet their debt obligations."

Singapore lags behind global peers

According to the 3rd Productivity Scorecard and Benchmarking Survey Report by the Institute of Singapore Chartered Accountants and SAP, Singapore companies take on average 9.2 more days to collect revenue compared to their global peers. In addition, they have significant higher receivables overdue as a percentage of revenue at 21.4 per cent compared to their global peer group at 11.5 per cent.