Small businesses in the United States are worried about country’s economic health

Small businesses in the United States face a grimmer outlook due to inflation, supply-chain issues, a shortage of labour, and rising interest rates. Focus on cash flow management has become more important than ever.

Want to know more about this topic? Listen to RIABU's Simon Littlewood and Mark Laudi discuss this issue on our podcast, Be First In Line To Get Paid:

According to a survey of more than 600 small businesses conducted in May by The Wall Street Journal, about 57% of small business owners expect economic conditions in the United States to worsen in the coming year, which is up from 42% in April.

About 61% of small businesses expect revenue to increase in the coming year, down from 79% in May 2020.

In another survey of more than 1,100 small businesses conducted in April by Goldman Sachs, about 80% of them said they faced hiring challenges or stayed at the same level since January. Many of them even said they faced problems in hiring qualified workers as larger companies were able to provide better pay and benefits to new employees.

In addition, the ADP payroll data indicated that employment among firms with less than 50 employees declined in both February and April, while head counts continued to increase at larger firms.

One of the business owners with eight employees highlighted that it faced a roughly 50% increase in raw-materials costs while the other entrepreneur said the company was operating at just a 5% profit margin as against the 25% that prevailed before covid.

Small businesses tend to have smaller cash cushions than big companies and generally are the first to experience the consequences of a recession. With diminishing optimism from the survey, SMEs need to take steps to prioritize their working capital, especially accounts receivable, in order to bring their cash flows in order.

Accounts receivable refers to invoices that have been generated for goods or services that have already been supplied to your client but have yet to be paid. These are measured in days of sales outstanding (DSO).

In the book Let the Cash Flow, RIABU proposes splitting DSOs into “terms-driven” and “process-driven” components, each of which must be managed differently.

For example, if you have credit terms of 40 days, but your DSO is 50 with a single customer, then 40 days of your DSO is “terms-driven” and 10 days is “process-driven”. The latter is in your control and your customer should have paid you so that you have a DSO of 40. If you have multiple customers with different terms, then a weighted average measure is required to calculate your terms-driven DSO.

When you actively manage your receivables, you ensure sufficient cash flows to run your business smoothly.  

Get more tips on effective cash flow management from our book, Let the Cash Flow. To find out more about how RIABU helps small businesses get paid on time, visit RIABU.com