5 Steps to mitigating SME cash flow gaps

Henry, the managing director of a facade maintenance company based in Manila, was having a great day — until he walked into his client’s office. Instead of collecting a promised P3 million check, he was met with a casual apology. “You’ll have it next week,” his client said. But Henry didn’t have a week. He had salaries and utilities to pay in three days. That missing P3 million wasn’t just a delay; it was a cash flow gap that could disrupt his entire business.

If you’re a business owner, you’ve probably been in Henry’s shoes. Cash flow gaps are one of the most common challenges for small- and medium-enterprises (SMEs) in the Philippines, usually caused by delayed collections, unexpected expenses, or seasonal fluctuations in revenue. The bad news? They’re stressful, especially if you have to come up with the money quickly. The good news? There are immediate steps you can take to navigate them and keep your business running smoothly.

1. Analyze your cash flow. The first step is to analyze your current cash flow situation by reviewing your financial statements, including your cash reserves, overdue invoices, and cash tied up in work in progress. This analysis will help you achieve two crucial goals. First, you’ll determine the exact amount needed to return to a positive cash flow position. Second, you’ll identify the root causes of your cash flow issues — and see if there are solutions that don’t require an immediate cash infusion.

2. Follow up on your accounts receivable. Do you have clients with overdue invoices? Follow up on them, especially the ones with the largest amounts owed. In this case, a friendly phone call to the client may work better than sending an e-mail or text reminder for payment. You can also negotiate a payment plan with them so they can pay part of the money owed immediately. Meanwhile, you can offer a small discount to clients with upcoming invoices to encourage them to pay earlier.

In the future, make it a point to improve your accounts receivable process by invoicing promptly, sending automated payment reminders, and having a clear payment policy to avoid confusion or delays.

3. Negotiate on your accounts payable. If your cash flow gap is due to accounts payable, consider negotiating longer payment terms with your suppliers. Extending your payment terms can provide temporary relief and help you manage cash outflows better in the future. Make it a practice to build a strong relationship with your suppliers — it can make them more willing to accommodate your needs during challenging times.

4. Reduce unnecessary expenses. Identify areas where you can cut costs without compromising the quality of your products or services. Review your expenses and prioritize essential spending. Consider the following cost-cutting measures:

• Eliminate Non-Essential Subscriptions: Cancel subscriptions or services that are not currently critical to your business operations.

• Optimize Inventory Management: Implement efficient inventory management practices to reduce excess stock and minimize holding costs.

• Review Utility and Overhead Costs: Evaluate your utility and overhead expenses and explore ways to reduce them — such as the use of energy-efficient equipment and appliances.

5. Explore a business credit line. If your cash flow gap persists, it may be time to explore financing options to bridge the gap. One effective solution is a credit line, a financial tool that provides flexible access to funds when needed, similar to a credit card.

In the Philippines, some financing companies, such as First Circle, offer non-collateral and free-to-open credit lines. This means you can activate a credit line before even encountering a cash flow gap, then keep it on standby as needed. New credit line applications can also be processed in as fast as two business days — a definite advantage over business loans, which can take a while to get approved.

Experiencing a cash flow gap is a common challenge for business owners — but it doesn’t have to derail your business. By being proactive in analyzing your cash flow, optimizing your accounts receivable, and reducing unnecessary expenses, you can come up with solutions that do not require coming up with money upfront. And in dire cases, exploring financing options, like a credit line, can help you right the ship quickly — just like it did for Henry, who applied for and activated a credit line in the three days before his payroll obligations were due. n

This article re fl ects the personal opinion of the author and does not reflect the o ffi cial stand of the Management Association of the Philippines or MAP.

Benedict S. Carandang is a member of the MAP Technology Committee and is the VP for External Relations of First Circle. This article was co-written with Jess Jacutan, an SEO and content marketing consultant for First Circle, an SEC-registered financial technology company that has been empowering SMEs through funding and free growth tools since 2016.