The Covid-19 pandemic sounded the death knell for many businesses of various industries.
According to figures from the Accounting and Corporate Regulatory Authority, business cessations in the retail trade sector hit a 10-month high in September 2020, with 457 companies pulling the plug on operations.
For many of these businesses, the inability to sustain operations due to a lack of funds was the key reason for their demise.
The Covid-19 pandemic has thus shone a light on the importance of cash flow in keeping businesses afloat.
The Importance Of Having A Strong Cash Flow
Cash flow refers to the money that is moving (flowing) in and out of a business in a month. Cash enters a business via customers or clients purchasing products, and leaves the business in the form of expenses.
If more money is coming in than going out, a business is deemed to be in a “positive cash flow” situation. However, if the converse happens, the business is in danger of failing if it cannot acquire fresh funds.
Maintaining a positive cash flow is beneficial to a business. It allows top-level management to make better plans and decisions, understand where the money is going, protect business relations, and identify the right time to expand.
In contrast, the lack of cash is one of the main reasons why small businesses fail.
Ricardo Sentosa, co-founder and CEO of Venuerific, told Vulcan Post that he learned early on in his business journey that managing cash flow was “not only a bloodline of the company’s survival, but also a key contributor of growth for the business.”
He further shared that after only six months of operations, the company ran into a debt of S$70,000 and had to almost shut down.
“If we had understood the risk and cash flow management from the start, we would not have expanded across multiple markets so early into the business,” he said.
Thomas Po, co-founder of Zairyo, added that having strong cash flow is especially important for the fast-moving consumer goods (FCMG) industry.
Zairyo is a Japanese specialty online gourmet grocer that gives customers access to air-flown produce from Toyosu Market, as well as a variety of curated gourmet foods.
Thomas explained that his business has to be ready for the next “hit” product at all times, and be able to afford importing the item in bulk for economies of scale.
If cash flow is tight, FCMG businesses are not able to secure products at scale, especially since most manufacturers usually require a downpayment first.
When Covid-19 hit, not many businesses expected it to last for such a long period of time. Without a strong cash flow, companies would not be able to withstand many months of highly-reduced revenues and survive the pandemic.
How Entrepreneurs Can Maintain A Strong Cash Flow
Ricardo believes that entrepreneurs should aim to maintain a minimum of six months operating cash flow in their accounts. This acts as a cushion for downturns or sudden surprises, such as the Covid-19 pandemic.
He added that they should also focus on creating recurring streams of revenue.
On the other hand, Thomas recommends conducting due diligence on any projects that a startup is on, and to always ensure that budgeting is done at the start of the financial year.
Their thoughts are echoed by Ravel Innovation’s founder and CEO Grace Sai, who said that managing cash flow is one of her key roles as the CEO of a startup.
She looks at the company’s projections and measures it against performance at least one to two times a week.
She accounts for every difference in dollar that she sees, so that the team can continue to sharpen its business acumen, view of the market and pipeline.
Enhance Cash Flow Management With Xero
Businesses traditionally use Excel sheets to manage reconciliation and finances, which is a very time-consuming process that is prone to human errors.
All of that has since changed with the advent of Xero, a cloud-based accounting software.
Founded in 2006, Xero is one of the fastest-growing software-as-a-service companies globally, and has helped over two million subscribers worldwide to simplify business processes.
Xero is built with start-ups, home businesses and SMEs in mind, as it is easy to navigate and intuitive for beginners. It is also robust enough to handle transactions even when a company scales.
Grace herself has used the Xero software from the start of her business journey, and she shared that the dashboarding functions were simple and user-friendly.
“If we were to continue to use Excel or any legacy accounting software, I probably would have to hire two times more manpower to manage this function of the business,” said Ricardo, who started using the Xero software in 2016.
The most common feature used by the Venuerific team is Invoicing, which has aided the management in providing a clear visualisation on how much revenue they can expect, and what they can spend on.
In addition, the Business Insights feature gives the team a smart analysis on the progress of the company.
The data collected by Xero helps business leaders to understand more about their customers and types of clients, while also getting a general sense of the economy.
Similarly, the Zairyo team chanced upon Xero four years ago, and realised that it was the solution to problems like quotations, invoicing and having a cloud-based central database of products’ cost prices that they could access anywhere.
At Zairyo, Thomas regularly utilises the Short Term Cash Flow and Business Snapshot functions to manage cash flow, which has allowed him to allocate resources efficiently.
As a financial controller, he is able to track the company’s financial health holistically with neater bookkeeping, easy tracking of payments and sending of invoices. Now, he uses Xero on a daily basis to have a bird’s eye view of the company’s daily cash flow.
To add on, the company has various sales channels apart from its e-commerce platform. Having all the sales data collected on a central accounting system with proper tagging allows them to have a holistic view of the potential of each channel.
“Just like how companies spend money on beautifying pantries and office spaces to boost productivity, a beautiful accounting program is the same. It makes it less painful for those who can’t deal with Excel sheets,” said Thomas.
It is in the interest of all businesses to minimise the time and effort wasted by its staff. Making use of a software like Xero is a worthy investment for startups and SMEs alike, especially since cash flow is one of the key aspects of a business.
To find out more about how to use Xero to maximise efficiency and cash flow, check out their website here.
This article was written in collaboration with Xero.
Featured Image Credit: Xero