SMEs Cash Flow: 7 Hidden Costs Affecting SMEs Cash Flow

SMEs’ vision is to achieve big growth, striving to capture the big market.  However, there are many hidden costs and unexpected overheads which may prevent SMEs from achieving this goal.  Below are the common overhead costs that many SMEs might not have considered or anticipated and may impact negatively on SMEs cash flow.

 SMEs Cash Flow

1.      High employee turnover

It takes time as well as money for any business to hire employees and train them up to become proficient in their roles, which could take up to 6 months.  If the company has a high employee turnover, this means the business is constantly paying a salary to someone who is not able to add value to the company, worse, distracting other employees from their role to help with interview, training and administrative set up.  Thus a high turnover in manpower in your company is indeed a costly affair and can impact SMEs cash flow.

2.      Operational Inefficiencies

Many SMEs are unable to recognise or identify inefficiency in the process or workplace.  This could be:

• a really slow PC that takes up employees’ time during the day, reduces productivity
• manual processing that could be automated easily with an off the shelf software or online application, for example, a book keeping application,
• Too many levels of approvals are required for insignificant activities.
• Standard Operating Procedure not setup or no effort to streamline processes
• Office environment does not encourage productivity. g. very noisy environment, cramped working space, insufficient meeting rooms or breakout area for discussions

Inefficiency is burning cash, increase in productivity, will increase revenue which in turn improves SMEs cash flow.

3.      Financing costs

Poor financial management, not understanding and having a non-rigid control of financing costs can hurt the business severely.  SMEs need to comprehensively understand their sales margin to ensure that every dollar that they bring in covers not only the Cost of Goods and overheads but that it also covers the actual cost of financing as well.  This includes all credit facilities, e.g. credit card, overdraft facilities, loans, invoice discounting to help smoothen SMEs cash flow etc.

4.      Long/late payment

More than half of Singapore’s SMEs are suffering from late payments, impacting SMEs cash flow.  This means that even though you have won a large project/sales and have already delivered the goods/services, payment or cash won’t be in your bank account for up to 90 days.  It is important that SMEs have sufficient cash reserve to survive the period.  SMEs that don’t have the reserve can apply for instruments such as an overdraft or invoice financing facility to smooth out the SMEs cash flow.

Nevertheless, SMEs should always try to reduce the payment terms to as short as possible to help with the cash flow thus supporting business growth and improve the SMEs cash flow.

5.      Regulatory / compliance costs

The cost to meet Regulatory and Compliance requirements can be substantial.  Many SMEs tend to play down or even overlook regulatory and compliance requirements.   This can lead to even higher costs to the business as inevitably the Authorities will catch-up and the penalties can be quite substantial.  It is essential that the SMEs run through their business model with an appropriate lawyer to ensure all regulatory and compliance requirements are planned and catered for.  This includes data protection policies, employment regulations and tax compliance.

6.      Corporate Property

Costs pertaining to protecting corporate property. These include IP, trademark, URL, copyright.  IP registration is usually very expensive and a very lengthy process.  IP registration is not required for every business type. Consult your lawyer for best advice.

Ensure all deliverables do belong to the company to avoid any future surprises.  For example, ensure that your IT system or any intellectual properties which were developed in-house or even outsourced are clearly the properties of the business.  Neglecting this can lead to dire consequences in the future of the company.

7.      Cost of your time

SMEs may face with many distractions on a day-to-day basis.  Distractions include everything that does not lead to sales.  For example, opportunity to attend business social events which are irrelevant to the business, opportunity to look into new products (when the timing is not right), meetings and travelling.  Over the long run the Company may suffer losses though not quantifiable in dollars and cents. Therefore, it is important for management to prioritise and focus on the tasks that help the business grow.  Everything else is just a nice-to-do.