SME owners, are you planning your finances?

Ravinder Kapur

Managing a private enterprise is not an easy task. Business owners need to ensure that they are always in a position to meet their customers’ requirements. It is necessary to constantly upgrade your products and services so that you can remain competitive. There is also always a constant stream of administrative tasks to be attended to.

However, one area that continuously requires an entrepreneur’s attention is finance. Every business needs an adequate amount of cash to survive. At all times, you need to be aware of these:

  • How much cash does your company have?
  • What are the fund requirements for the following 30 days and beyond?
  • Do you have a cash buffer to meet emergency needs?
  • Do you have a fair idea of how much is owed to your business and when you can expect to recover it by?

You need to have discipline and a certain level of financial expertise if you are to effectively manage your cash position. A firm that has a grip on its cash levels will be in a position to honour its financial commitments. Additionally, it will have the liquidity to capitalise on new business opportunities.

Here are some points that SME owners might find useful in managing their finances.


Separate your personal and business expenses

Source: Shutterstock

Many entrepreneurs who are just starting out, make the mistake of using the same bank account for their business transactions as well as their private expenses. If you follow this practice, you will create additional work for yourself.

At the end of the year, you will have to sit down and try and remember which expenses were of a personal nature and how much you can claim as business expenditure. Remember that business expenses are tax deductible. If you mix up the two, you could be exposing yourself to questions from the Inland Revenue Authority.

If the tax authorities find an error in your computations they may decide to carry out a detailed audit. This can prove to be time time-consuming and may require you to dig up old receipts and invoices.

Keeping separate accounts will simplify the filing of your tax returns and also help in keeping track of the cash position of your business.


Don’t wait for the last moment to raise money

SMEs sometimes find themselves facing a cash crunch. A big customer may not pay on time. Or you may need extra cash to buy supplies and raw materials for a large order. If you start hunting for a loan after the need for funds arises, you could face a situation where you would have to settle for unfavourable terms.

In their desperation for cash, entrepreneurs, sometimes agree to bear higher interest rates. Instead, it is better to raise finance when you don’t actually need the money. If you do this, you will not be in a hurry and you can negotiate the best terms.

Take your time and shop around for the lowest interest rates. Standard Chartered offers its customers a business overdraft facility that carries attractive terms. Finance up to S$300,000 is available at a rate of 9% per year. You could also consider a business term loan from DBS SME Banking. An advance of up to S$500,000 is available at interest rates starting at 10.88% per year.


Get your accounting right

Maintaining accurate accounting records is essential for filing your tax returns. But keeping a detailed and meticulous track of your expenses and receipts also has several other benefits. You will find it easier to control your expenses, identify waste, and prevent fraud and theft.

Some SME owners make it a practice to delegate all their accounting work to an employee. They take the stand that they do not understand how bookkeeping works. Whenever they need any information, they turn to their accountant.

It is highly inadvisable to follow such a practice. As a business owner, you should have at least a basic idea about how accounting records are to be maintained. This will help you keep a track of your finances. You will also be in a position to check whether your accountant is doing a good job of maintaining your business records.


Get a grip on your seasonal cash requirements

Experienced SME owners know that there will be times when they are flush with cash and periods when they have to look for external sources of funds to meet their day-to-day requirements. There is usually a seasonal pattern to the ups and downs of your firm’s liquidity position.

A retailer may need to stock up just before the holiday season. This would put a strain on your finances and you would need to arrange the money to ensure that you have enough inventory to meet demand. Similarly, you may need additional funds when tax payments are to be made or when salaries or bonus is to be paid.

It is a good idea to plan well in advance for the seasonality of your cash requirements. Setting money aside or arranging a bank loan that you can draw upon will help you tide over the periods when your business needs additional funds.


Update your cash flow statement regularly

Analysing your cash inflows and outflows will help you understand whether your business is generating enough money to sustain itself. Remember that making a cash flow statement is not a once-in-a-year exercise. You should make it at least once a month. For rapidly growing businesses, preparing a weekly cash flow statement is advisable.

You should not neglect this important exercise and neither should you leave it entirely in the hands of your accountant. If you examine your cash flows regularly, it will help you to monitor the pulse of your business and guide you in taking corrective action when it is needed.

(By Ravinder Kapur)

Related Articles
- More help for SMEs in Singapore?
- Singapore SMEs: financing through debt crowdfunding platforms
- Breaking down the budgeting process for SMEs