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As cost-of-living pressures and economic uncertainty continue to affect small and medium-sized enterprises (SMEs), managing cash flow has become a critical component for growth and resilience.
Banjo Loans’ senior credit officer Jane Martini has shared seven key cash flow drivers that every SME should understand to successfully navigate their business life cycle.
1. Sales
Sales – the income generated from selling a product or service – is the first and foremost driver of cash flow. Understanding sales performance is essential for assessing income sustainability.
Banjo Loans advises SMEs to regularly review their pricing strategies, ensuring that every product or service sold results in net profit. Businesses should also evaluate whether increasing sales involves selling more products, raising prices, or a combination of both.
2. Cost of goods sold
The cost of goods sold (COGS) refers to the direct costs associated with producing the goods or services sold.
It significantly impacts gross profit, the figure before accounting for operating expenses. Understanding COGS and gross margins will allow SMEs to assess where costs can be reduced and efficiency improved and will enable them to compare financial periods to track improvements or declines in their margins.
3. Operating expenses
Operating expenses include the costs required to run the business, such as rent, wages, administrative fees, and entertainment costs.
Banjo Loans highlighted the importance of factoring these expenses into annual budgets. Effective management of operating costs is crucial for profitable growth and long-term success.
4. Accounts receivable
Accounts receivable refers to the money owed to a business by its customers. SMEs can enhance their cash inflow with effective credit policies, efficient invoicing, and diligent follow-up on overdue payments.
Banjo Loans advised SMEs to streamline their invoicing process and ensure consistent follow-up to accelerate cash collection.
5. Accounts payable
On the flip side, accounts payable represents the money a business owes to suppliers.
Optimising the timing of cash outflows can help preserve cash flow. Banjo Loans encourages SMEs to explore multiple supplier options and negotiate favourable payment terms to better manage their outflows.
6. Inventory
Maintaining optimal inventory levels is essential for cash flow management. Having enough stock to meet demand while avoiding excess inventory – which ties up cash – is key.
Banjo Loans recommended regularly reviewing inventory turnover rates to reduce waste and improve cash efficiency.
7. Capital expenditure
Capital expenditure refers to the investment a business makes in long-term assets, such as equipment, property, or technology, to support growth.
While critical, SMEs need to forecast capital expenditures carefully to ensure these investments align with the company’s long-term health and objectives.
“It’s important for finance brokers and small business owners to understand the intricacies of their financial challenges,” Martini said.
“Too often, business owners wear too many hats, trying to manage product development, marketing, and accounting all at once. Investing in a good accountant to manage cash flow or a marketing manager to promote the product are invaluable investments.”
Martini also said that SMEs sometimes fail to forecast trends effectively or react in time to negative industry shifts.
“With situations escalating and leaving them behind in the long run,” she said.
As businesses continue to navigate uncertain times, understanding these seven drivers can help SMEs safeguard their financial stability and foster sustainable growth.
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