Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsImproving Cash FlowOne of the most important aspects ofrunning a business is to ensure that thereis adequate cash fl ow to meet all of theshort-term obligations. The survival of yourbusiness will depend on this. Referred toas working capital management, this is allabout setting up strategies to ensure thatthere is enough cash in the business tooperate on a day-to-day basis withoutfacing a cash fl ow crisis.Working capital in business is made up ofthese core components:• Inventory management;• Work-in-progress;• Payment to suppliers (creditorpayments); and• Collection of cash from customers(debtor collection).Working capital is theshort-term capital thatworks for the business.This includes inventory,work-in-progress,payment to suppliersand receipt fromcustomers. By workingon your cycle moreeffi ciently, you wouldhave more readilyavailable cash to use inother parts of thebusinessOften referred to as “the working capital cycle”, this is really about the lengthof time it takes from using your cash to purchase inventory (or perhaps gettingit from a supplier on credit terms), and using the inventory, possibly for amanufacturing purpose (hence creating part of the cycle called “work-in-progress”),to securing the sales and receiving the cash.Here is a diagramme of the working capital cycle:Manufacturer or Product ProviderCASHDebtorsPurchaseInventoryService ProviderCASHSalesSupplierPaymentDebtorsSalesWork-inprogress47Chapter 2-5 p22-65 Eng.indd 478/15/11 5:01:56 PM