Banjo Loans reveals how SMEs can make ‘7 cash flow drivers’ work for them
Amid ongoing cost-of-living pressures and economic uncertainty, managing cash flow has become crucial for any small and medium-sized enterprise (SME) aiming to grow in these uncertain times.
Banjo Loans‘ Senior Credit Officer, Jane Martini (pictured), has revealed the seven key cash flow drivers every SME needs to understand to effectively navigate their business lifecycle.
With practical insights on how to manage unexpected financial challenges, Ms Martini highlights those cash-flow variables that can help businesses stay resilient, even in volatile conditions.
- Sales: Understanding sales — the income gained from selling the product or service — is crucial for SME businesses when assessing how much they are earning and the sustainability of their income. Banjo Loans recommends regularly reviewing pricing strategies, ensuring for each product or service sold to customers that there is, above all, a net profit. If you’re aiming to increase your sales, will that mean selling more products or services, or increasing your price, or a combination of both?
- Cost of Goods Sold: Cost of goods sold — the direct costs associated with producing goods or services sold by the business — directly impacts gross profit (the total monetary figure before operating expenses). Understanding cost of goods sold and gross margins (the gross profit as a percentage of your sales) will help determine ways to bring costs down, while improving efficiency. It will also help you compare periods to see if your margins are improving or declining.
- Operating Expenses: The cost of all things that keep the business running (rent, wages, administrative fees, entertainment costs), factoring operating expenses into annual budgets is crucial if you are looking to grow, and careful management of operating expenses is key to business success and profitable growth.
- Accounts receivable: The money owed to a company by its customers. With effective credit policies, invoicing and follow up processes in place, business owners can accelerate their cash inflow. Banjo recommends SMEs diligently following up any overdue payments and streamlining the invoicing process.
- Accounts payable: The money owed to a company’s suppliers, helping preserve cash flow by optimising the timing of cash outflows. Rather than being dictated by only one supplier, Banjo encourages SMEs to explore multiple options and negotiate favourable payment terms.
- Inventory: Optimising inventory levels is essential: businesses need enough stock to meet demand, but excess inventory ties up cash. Regularly reviewing inventory turnover rates can help SMEs reduce waste and improve cash efficiency.
- Capital Expenditure: For most SMEs and other businesses, capital expenditure — how much a business invests in long-term assets like equipment, property or technology — is necessary to drive growth. While it is critical, SMEs need to carefully forecast appropriate capital expenditure to support their company’s long-term health.
“It’s important for finance brokers and small business owners to understand the intricacies of their financial challenges,” Ms Martini said.
“Too often, business owners wear too many hats, trying to manage the product development, marketing and accounting. Investing in the services of a good accountant to manage cash flow, or a marketing manager to promote the product are invaluable investments.
“Sometimes SMEs don’t do enough trend forecasting and don’t react early enough to negative industry trends,” Ms Martini added, “With situations escalating and leaving them behind in the long run.”
To learn more about cashflow management, check out Banjo Loans’ on-demand webinar, Navigating Cashflow Management, on how SMEs can unlock financial health insights and improve their cashflow management and understanding in the long run.
