Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsIn month 1, Adam only collects RM26,000 from sales, but he has to buy allthe computer bags in the same month. He only receives the cash for salesof another 200 bags in month 2 and the balance through the rest of the year.So the above table shows that at the end of month 1, he will need an extraRM8,320 to cover the purchase of the bags, and, by the end of the year, hisbank balance will match his gross profit. Of course, he will also haveto cover the operating expenses throughout the year, which have not beenincluded in the above table.TIPThe timing of when cash is received is the most important issue whenmanaging cash flowCash Flow Drivers in Your BusinessEven when your business is profitable,managing cash fl ow can be very important. Byidentifying what “drives” the cash fl ow in yourbusiness, it will be easier to manage your cashfl ow. What do we mean by “drivers” of cash fl ow?They are the things in your business that affectyour cash fl ow the most. For most businesses,this will be sales. However, for some businesses,it could be something else. Let us look at the mostcommon key drivers of cash fl ow and this will helpyou to determine the key drivers of cash fl ow inyour business.HINTCash fl ow is thelifeblood of everybusiness. A profi tablebusiness can stillsuffer from shortagesin cash, so it isimportant tounderstand what“drives” yourcash fl owAccounts Receivable (Debt Collection)Sales are important for all businesses. After all, this is what ultimately generatesprofi ts for your business. From Adam’s example on the previous page, it canbe seen that the collection of cash from sales is critical to ensuring that he hassuffi cient cash in the bank. So, if sales are the key issue for you to managecash fl ow, then you must have good procedures in place to ensure that you canconvert the sale to cash as quickly as possible. The best way to do this is tomanage the collection of cash from your customers using the checklist in theprevious chapter.69Chapter 6 p66-78 Eng.indd 698/15/11 5:02:24 PM