Top tips for SMEs: Optimise cashflow and future proof businesses

18 June


The pandemic has been devastating for all businesses. Some were able to innovate their models to keep trading whereas others have had to close and are simply waiting until the time is right for them to serve their customers again.

With lockdown easing underway, many businesses are reopening or stepping up their operations and encountering the problem of needing cash up front to achieve this. From buying stock to getting vehicles back on the road and restarting sales and promotional activities – all before starting to generate revenue.

Thore Vestergaard, MD of Commercial Card at Allstar Business Solutions, explores how those businesses can maximise their cashflow during the uncertain period of lockdown easing.

Crippling cash deposits

For small to medium sized enterprises (SMEs), the risk of running out of cash is higher than ever and there is little sign of this pressure easing anytime soon. It will most likely be a slow, gradual recovery stretching will into and potentially beyond 2021 for some industries before cashflow levels are restored to what they were pre-COVID-19.

With that said, most SMEs will have already had to dip into their cash deposits. This is because very little cash will have come into their coffers for the last few months. SMEs needing to survive may well have depleted their deposits completely despite the government support that has been available since March.

Government support schemes – a short term fix?

Most support schemes aimed at SMEs such as grants, loans and deferred VAT payments all help but are short term, “artificial” cashflow fixes. They are designed to enable SMEs to stay afloat for longer but don’t necessarily eliminate the underlying problem, especially in elongated periods of declining economic activity. The majority of these funds will need to be paid back too which simply prolongs the inevitable for many UK SMEs.

For those still trading, it may be increasingly difficult to get commercial loans, as lenders are more risk averse during a crisis, so they may struggle to find the cash they need to reactivate their business activities, replenish or renew stock and reinvest in marketing as customers reemerge in the market.

It is important to note that the reason behind most businesses folding is not that they don’t have a viable business proposition but because they run out of cash. Therefore, it is critical that SMEs evaluate alternative ways to optimise their cashflow. By delaying money going out and accelerating the money coming in it will help companies not only survive – but to regain a healthy cashflow balance so they again can focus on growth instead of just staying alive.

Top tips for SMEs to optimize their cashflow:

1. Work with your suppliers to improve payment terms

By working with your suppliers in an open and practical manner you’ll be able to negotiate better terms that could help your cashflow. For example, I would recommend starting with your high-volume suppliers to negotiate longer payment terms. Also, consider supplier aggregation where possible as it is easier to negotiate on terms when you can offer something in return (like more business).

It is also important to pay suppliers by payment card where possible. This helps to maximise free credit periods and allows you to benefit from discounts and cash-back. Having a payment card in your business will also enable you to benefit from better deals and “early payment discounts” for ad-hoc payments away from your normal supplier relationships, saving you money. However, you must be mindful of fees, so settle your statement in full as interest rates applied can quickly eat into any benefits derived.

2. Offer choice to your customers on payment terms

It goes without saying that your customers are your lifeblood. So, by giving choice in their payment options you will have happy customers that will keep coming back. Start by offering early payment discount options to get payments quicker and reduce your collection costs.

Also, consider encouraging customers who normally pay on invoice to pay by card at the point of order. This means you are guaranteed payment and receive cash normally within 48 hours. You should also take the opportunity to negotiate better rates with your card payment merchant acquiring service provider.

3. Understand which low cost financial products can help stretch your cash flow and make savings

Ensure you have low cost back-ups to your primary working capital solutions to give yourself flexibility and help avoid using expensive overdrafts or short terms loans when something unexpected happens, like a large customer paying late.

If you haven’t already, speak to your bank and see if they will offer you free charge cards which generally will give you up to 30-50 days free credit on purchases.

What’s more, they can also come with additional benefits too. Unlike credit cards, charge cards must be paid back in full on the payment date, so you don’t run the risk of paying high fees for revolving credit (the most expensive form of credit). If you do go for credit cards make sure you select the ones that offer good transfer deals and other benefits like cash back. And always pay the balance off in full.

Another option to explore is faster payments. These are offered by most banks at a low, fixed fee meaning you can delay paying bills right up to the deadline as transactions are processed within minutes. This keeps the cash in the business for as long as possible.

Finally, don’t assume your bank always has the best offers for loans, credit and charge cards and general payment services. Shop around and speak to the experts. There is a wide range of new and exciting providers in the marketplace who specialise in servicing SMEs – who’ve long been overlooked, underserved and over charged by the traditional high street banks.

Now is the time for SMEs to act

SMEs that take the time to proactively work with customers and suppliers, as well as shop around for the latest tools on the market will be the businesses that remain in the best position to emerge strongly from this pandemic.

As a provider of credit and cashflow to hard-working businesses across the UK, we at Allstar Business Solutions are playing our part to aid the recovery and reactivation of SMEs nationwide with our advice and expertise. So, If SMEs follow the tips recommended above, they’ll be in a better position to emerge from the lockdown in a strong place and can look forward to a promising future.  

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