Cashflow Management: Keeping Your Business Healthy

Welcome to the second of our two-part series on ‘Managing Your Business Finances’ in which we touch on the importance of cashflow management. Find out more what you can do to keep your ‘business lifeblood’ flowing, with insights from our panel of successful business owners and financing experts.

Are businesses which show a net profit on their profit and loss statements always in the pink of financial health? Well, in many cases, the answer is no.

While your business may be profitable on the books, you need to consider the cashflow of your company too. You must have sufficient cash in the bank to pay your suppliers, employees and landlord in a timely manner even when sales are low.

Dr. Gloria Kong — who owns the Kong Dental chain of dental clinics in Singapore, recommends business owners to plan to have cash reserves equivalent to 3-6 months of their monthly operating expenses, before they start their operations.

To help you make sense of cashflow management—and how to get around common pitfalls — we spoke to our panel of business owners and financing experts to bring you their insights.

Ready to hear more? Let’s jump in.

Uncovering The Gaps

Assuming that your operating expenses are reasonable, the most common scenario for a cashflow gap is when your customers are not paying you fast enough to cover your payment obligations.

For example, you take on a big project for which you will not receive payment until its completion a few months later. In the meantime, you are still paying rent and employee salaries. This will result in a cashflow gap in your business.

Seasonality may play a part in affecting one’s cashflow too. You need to ensure you have enough cash to pay for larger orders during peak periods. For example, a Chinese restaurant will need to stock up on pricey abalone — paying suppliers upfront — ahead of the Chinese New Year festive period.

Planning Your Cashflow

Heavy demands are made on your cashflow when you need to invest ahead of time as your business grows. This may come in the form of hiring additional employees or purchasing new equipment.

However, your sales turnover will not automatically increase with added capacity, so you need to assess if now is the right time, and whether you have the cash reserves to tide you through the period of increased expenses and excess capacity.

Mr. Lai Chang Wen, co-founder and CEO of Ninja Van, advised that major investments must be carefully evaluated and timed.

“When you buy a machine, you are committed to say, processing 30,000 parcels a day. When your volumes are doubling every two years and you reach 40,000, the question is whether you should buy a bigger machine now and run it at half its capacity or keep using the current machine at full capacity and change it next year.”

Mr. Alvin Ang — founder of events marketing firm Jump Solutions — shared that if you are hiring additional employees, you must take into account the time needed for training before they can contribute to revenue generating activities. “From experience, we know it takes 4 to 6 months to fully train a new employee. When we know there is going to be a spike in market demand, we take up some additional financing to plan ahead for the drain in cashflow.”

All of this suggests that good business foresight and planning go a long way towards saving one from running into cashflow issues.

Leveraging for Success

Many of the scenarios we shared are common occurrences. This suggests cashflow management is part and parcel of running a business. To ensure you have the resources to capture opportunities when they arise, you may consider getting a commercial loan.

Ms. Rashida Ismail, Managing Director at OCBC Bank, shared with us the different types of loans for different needs: “If you are looking to set up a new outlet or make big purchases like machinery, term loans are the most suitable as you make repayments in instalments of manageable size.”

On the other hand, it is useful to have a revolving line of credit — which you don’t need to pay interest if you don’t use — on standby for days when you are tight on cash. It is usually the most common solution to bridge the gap between a business’ account receivables and payables. Find out more about loans here.

Taking A Forward View

Addressing the view amongst traditional business owners that a business loan is only taken when a business is failing, Ms. Rashida said, “A common misconception is that a company needs to borrow only when it is in a dire state. Modern businesses borrow as a means of achieving business growth, such as investing in technology to drive productivity.”

Start-ups will be happy to note that OCBC offers financing to young companies from 6 months of incorporation to help them grow their business at the early stage.

To have a better chance of succeeding in your loan application, Ms. Rashida said that “Banks look at the company’s repayment capability and guarantors’ creditworthiness. So having sound personal finances will increase your chances of securing a loan. Also, even if you do not have a pressing need for additional funds, you should take a small loan to build a positive credit track record, which will aid your future loan applications.”

Rounding Things Up

Good cashflow management is essential if you are to grow and scale and your business to the next level. Commercial financing can provide you with the leverage to seize opportunities that come along. When the time is right, don’t be afraid of borrowing for the business if you’ve done your sums and it makes sense.