Running a small or medium-sized enterprise (SME) is not just about generating sales or recording profits – it’s about ensuring the business remains liquid, agile, and financially stable. One of the most overlooked yet vital aspects of financial health is cash flow. It’s not enough to be profitable on paper; what truly sustains operations is the availability of actual, usable cash.
Many business owners fall into the trap of equating profitability with financial security. However, a profitable business can still face cash shortages if earnings are locked in receivables or unsold inventory. That’s why monitoring cash flow, making projections, and applying strategic fund allocation are essential, especially when funds are tight.
Below are key points explaining why cash flow is the heartbeat of an SME, how it supports effective budgeting, and how simple tools can help owners manage liquidity more effectively.
1. Profitability Doesn’t Always Mean Liquidity
It’s a common scenario among SMEs: the books show a strong net income, yet the business struggles to pay suppliers, salaries or rent. Why? Because the profits are unrealized – they’re tied up in accounts receivable or inventory.
In these cases, despite reported earnings, the business may still struggle with actual cash to cover daily expenses. This is where understanding the Cash Conversion Cycle (CCC) becomes helpful.
The CCC measures how long it takes for a business to convert its investments in inventory and other resources into actual cash from sales.
CCC = DIO + DSO – DPO
Where:
• DIO (Days Inventory Outstanding): How many days inventory is held before it is sold (e.g., 45 days)
• DSO (Days Sales Outstanding): How long it takes to collect customer payments (e.g., 30 days)
• DPO (Days Payables Outstanding): How long you are allowed to defer payments to suppliers (e.g., 40 days)
Example:
If your DIO is 45 days, DSO is 30 days, and DPO is 40 days:
CCC = 45 + 30 – 40 = 35 days
This means it takes 35 days from paying for inventory to collecting cash from sales. The shorter this number, the better for your cash flow. Effectively managing receivables, inventory, and payables helps shorten the CCC and strengthen liquidity.
2. Monitoring and Projecting Cash Flow
Cash flow monitoring means keeping track of all money coming in and going out. Projections allow SMEs to anticipate upcoming shortfalls or surpluses.
Why It’s Essential — Think C.A.S.H.:
• Clarity: Stay aware of your current cash position and determine whether you can meet short-term obligations.
• Anticipation: Prepare ahead by knowing when cash might run low, so you can time your expenses or investments wisely.
• Stability: Avoid disruptions by identifying potential cash shortfalls before they happen.
• Handling: Allocate and manage cash efficiently to ensure smooth daily operations.
As a practical application, SMEs can prepare a basic monthly cash flow statement:
• Beginning Cash Balance: ₱150,000
• Cash Inflows (e.g. collections, loans, capital): ₱350,000
• Cash Outflows (e.g. salaries, rent, inventory): ₱290,000
• Net Cash Flow = ₱350,000 – ₱290,000 = ₱60,000
• Ending Cash Balance = ₱150,000 + ₱60,000 = ₱210,000
A positive net cash flow like this indicates that the business has more cash than it spends. This figure can be used to project future fund requirements, decide how much to reinvest, and determine if you can support growth or cover unexpected costs.
3. Operating Cash Flow: Beyond the Numbers
Once SMEs regularly monitor and project cash flow, the next step is to dive deeper by analyzing operating cash flow (OCF)—a more specific indicator of how well core business operations are generating cash.
While a basic cash flow statement gives a snapshot of total inflows and outflows, OCF focuses on the cash generated from day-to-day operations, excluding financing (like loans) or investing activities. This gives a clear picture of whether the business model itself is sustainable.
Formula:
Operating Cash Flow = Cash received from customers – Cash paid for operating expenses
A positive OCF means the business can sustain itself, pay for its costs, and potentially grow—all without relying on external funding.
On the other hand, a negative OCF may signal problems like poor collection practices, high overhead, or pricing issues.
By combining regular cash flow monitoring with operating cash flow analysis, SMEs gain not just visibility, but also the insight needed to make confident financial decisions.
4. Budgeting Based on Real Cash
Many SMEs prepare budgets based on revenue expectations. The problem? Revenue doesn’t equal available cash – especially if collections are delayed.
A better approach is cash-based budgeting:
• Spend only what you have or will surely receive
• Prioritize necessities (payroll, rent, key supplies)
• Defer non-essentials until surplus cash is available
Aligning spending with real cash prevents overcommitting. It promotes a lean, responsible culture that adapts to uncertainty.
5. Managing Cash Flow in Tight Periods
When cash is limited, SMEs must act quickly and strategically. A helpful way to remember key actions is to think F.L.O.W. – a simple guide to keeping your business finances moving even in tough times:
• Follow up on receivables: Accelerate collections by reminding customers, offering early payment discounts, or tightening credit terms.
• Limit inventory: Purchase only what’s necessary, reduce slow-moving stock, and avoid over-ordering.
• Optimize payables: Negotiate better terms with suppliers to extend payment periods without damaging relationships.
• Withhold non-essentials: Delay or freeze non-urgent spending, such as equipment upgrades or expansion plans, until cash flow stabilizes.
Additionally, use insights from your CCC to identify where cash is being held up—whether in receivables, inventory, or payables—and take action accordingly.
To sum it up, managing cash flow isn’t just about tracking money—it’s about building discipline, foresight, and financial control into your daily operations. By understanding where your cash goes and how fast it moves through your business, you gain the ability to make smarter decisions, even under pressure. With the right tools and mindset, SMEs can turn cash flow management into a strategic advantage—not just a survival tactic.
CONSULTANT’S PROFILE:
Christy Malaya R. Añana, known to many as Maymay, is the Founder and Managing Owner of AM Consulting (registered as AFCM Corporate Office Services), a consultancy firm based in Cagayan de Oro. The firm delivers specialized consulting services in two core areas: Finance and Business Process Management, and Human Resources. Despite its current base, AM Consulting now serves a growing number of clients in Luzon and other parts of Mindanao.
Maymay is a Certified Public Accountant and a Certified Financial Consultant, accredited by the Institute of Financial Consultants. She is also a recent graduate of the Chief Financial Officer Program and the Business and Management Consulting Program at the Asian Institute of Management.
With over 15 years of experience in both middle and top management roles, she has a strong track record in: Organizational Development, Business Process Improvement, Finance and Accounting Management, Human Resources Management, Strategic Planning and Budgeting.
Her passion lies in helping businesses operate more efficiently, build sustainable structures, and unlock growth opportunities through process-driven, people-oriented solutions.
Ms. Maymay may be reached through:
Viber or Telegram – 0917-771-4931
Email – maymayanana.amconsulting@gmail.com
