5 common cashflow mistakes SMEs make and how to avoid them

If you've run into cash flow problems while running an SME in the MENA region, you're probably asking yourself one of these questions:
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• "How is my business profitable but I have no cash?". Sales are good, customers are happy,
   yet you're scrambling to pay suppliers.
• "Why does my financing cost so much when my business is doing well?" You qualified for
   funding, but the interest rates and fees seem excessive compared to what you expected.
• "Am I making the right financing choices, or am I setting myself up for bigger problems?"  
   You're second-guessing decisions that seemed obvious when you were desperate for cash.
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If you're thinking of how to avoid having these challenges, you’re in the right place. In this article, we discuss major cash flow mistakes that SMEs in MENA make and how to avoid them.

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Some SMEs invest in accounting systems late. Though manual accounting processes might seem like a  “cost-effective” option, the downsides of manual accounting outweigh its benefits. Some significant cash flow challenges caused by maintaining manual accounting processes include:
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• Human error
  ‍Human error becomes unavoidable when you rely on spreadsheets or paper-based records. This leads to miscalculated invoices, incorrect payment entries, and unreliable financial data, which can result in costly business decisions.
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• Bottlenecks and missed collections
  ‍Manual processes create operational bottlenecks as your SME grows, resulting in delays in invoice generation, payment processing, dispute resolution, and financial reporting. 
  
  These operational bottlenecks can directly impact your cash collection cycles. For example, using a manual tracking system to manage collections can result in frequent missed collections and overdue payments. 
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• Unnecessary headcount 
  ‍SMEs often overstaff to manage manual bookkeeping tasks. This can lead to inflated operational costs and waste of time and resources that could have been redirected to revenue-generating work and strategic planning.  
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• No tracking and financial analytics
  ‍Manual systems do not provide real-time tracking capabilities or financial analytics. Relying on this system means your SME is operating blindly without proper hindsight to analyze past performance or foresight to predict future cash flow patterns. Such a limitation prevents proactive financial management and strategic decision-making.
  Additionally, compliance risks worsen as manual systems struggle to maintain VAT compliance, zakat calculations, and statutory reporting requirements, potentially attracting penalties and regulatory scrutiny that further strain cash flow.
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• Lack of integration with banking and payment systems
  ‍Manual accounting systems can't automatically reconcile bank transactions, leading to: 

1. Daily or weekly snapshots instead of live cash positions
2. Manual data entry from bank statements into accounting software
3. Time lag between when transactions occur and when they're recorded
4. Human error in transferring transaction data
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To prevent using accounting systems late:

• Use cloud-based accounting software, like Zoho or QuickBooks, within the first year of your operations. 
• Connect these accounting tools with A/R automation software, like Kema, send automated payment reminders, improve collections, and track overdue receivables.
• Train your staff to enter financial data correctly.

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UAE SMEs often treat financing as a one-size-fits-all solution, overlooking critical differences in repayment structures and costs. This misconception leads businesses to accept unsuitable financing that creates additional financial strain rather than providing the intended relief. 

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The first step to avoid choosing the wrong type of financing is to understand different financing options and their uniqueness. Some common financing types include:

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• Traditional Bank Loans: Fixed-rate loans with regular monthly payments and collateral requirements.
• Cash Flow Lending: Unsecured financing based on revenue streams rather than assets.
• Asset-Backed Lending: Secured loans using business assets (inventory, equipment) as collateral.
• Trade Finance: Letters of credit and trade facilities for import or export transactions.
• Invoice Factoring: Immediate cash advance against creditworthy outstanding customer invoices.
• Equipment Finance: Specific loans for purchasing business equipment with the asset as security.
• Angel Investment or VC: Equity investment in exchange for ownership stake and growth potential.
• Government Grants or Funds: Non-repayable funding or subsidized loans for qualifying businesses.
• Islamic Finance (Murabaha): Sharia-compliant asset financing with profit margins instead of interest.
• Short-term Working Capital: Credit facilities for immediate operational needs (3-12 months).
• Long-term Growth Finance: Extended repayment terms for expansion projects (2-7 years).

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To avoid choosing the wrong financing:

• Research and compare at least 3-4 financing options before choosing one for your SME. 
• Attend SME financing workshops. 
• Hire a fractional CFO who understands the UAE market to assess your financial situation and suggest the right financing.

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Many UAE SMEs have accepted cash flow limitations as an inevitable part of business operations, viewing periodic financial strain as the norm rather than addressing underlying systemic issues causing it. 

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This mindset prevents small and medium businesses from implementing effective solutions that could stabilize their financial position.

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The late payment problem in the Middle East exceeds global averages, with Middle Eastern SMEs experiencing higher payment delays compared to the global average. 

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“As of Q4 2023,  Middle East and APAC also has the largest proportion of firms exposed to the longest DSO and thus to cash-flow risks: 21% of companies are paid after 90 days (compared to 17% globally)...”

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•  Middle East Payment Report (2024)

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Accepting such poor payment behaviors and subsequent cash flow constraints as normal hinders SMEs from exploring financing options, negotiating better payment terms, or investing in cash flow management tools.

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To solve this:

• Review your A/R processes critically. This can dramatically improve cash flow. 
• Using tools like Kema, implement effective accounts receivable management, like automated invoice generation and follow-up workflows to reduce collection periods by 15-30%. 
• Assess customer creditworthiness and payment term negotiations to minimize cashflow risks.
• Consider alternative financing providers for emergency situations. For instance, Kema's invoice financing service provides UAE SMEs with up to 500,000 AED within 24-48 hours.

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Another cashflow mistake SMEs make is operating without established key performance indicators. In cashflow management, small changes can have a significant impact on business survival and growth. This is why you must measure your SMEs financial health. 

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Failing to operate with financial KPIs leads to uninformed decision-making that can cause unexpected financial crises. For example, you may expand operations, increase inventory, or hire additional staff without understanding your cash conversion cycle, or working capital requirements. These decisions, made without careful consideration, often cause cash flow problems and have a negative impact on your financial health.

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Critical metrics like Days Sales Outstanding (DSO), aging reports and Average Days Delinquent (ADD), provide advance notice of potential liquidity issues. Without tracking these indicators, businesses only recognize problems after they've become critical, leaving limited time to make necessary corrections. 

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Additionally, strategic planning becomes impossible without baseline performance data and trend analysis. You cannot set realistic revenue targets, plan capital investments, or secure appropriate financing without understanding your historical performance patterns and current financial position. 

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To measure your SME’s financial health:

• Track important A/R metrics like Day Sales Outstanding, Collection Effectiveness Index, etc.
• Get financial partners like fractional CFOs to analyze these KPIs and suggest next steps.

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Many UAE SMEs rush to seek external financing without addressing fundamental operational inefficiencies, mistakenly believing that capital injection will solve underlying cash flow problems. However, financing merely amplifies existing strengths and weaknesses within an SME's operational structure rather than correcting systemic issues.

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Also, investors and lenders can see through the cracks and perceive operationally immature businesses as higher-risk propositions. For such a business, this means stricter loan terms, increased interest rates, and more stringent repayment schedules. This further strains cash flow rather than alleviating pressure. 

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Banks evaluate creditworthiness based on financial controls, reporting accuracy, and customer quality. SMEs with inadequate credit policies attract less creditworthy customers, reducing eligibility for invoice financing and asset-based lending options.

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When such SMEs eventually receive funding, the inefficient deployment of the funds becomes inevitable because the underlying processes remain broken. SMEs may use borrowed capital to compensate for collection delays or operational inefficiencies rather than investing in growth initiatives, essentially paying interest to subsidize poor management practices.

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Establishing robust operational foundations before seeking financing ensures that external capital drives genuine growth rather than masking operational deficiencies. 

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How to choose between financing and A/R automation:

• Spend 6-12 months optimizing internal processes before seeking external funding. 
• Document procedures, implement basic automation, and establish 6 months of clean financial records. 
• Seek financial advice to improve cash flow processes before approaching lenders or investors.

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With the right tools, financial systems and accounting partners, you can set up your SME for healthy cash flow consistently regardless of dips in demand and changing customer behavior.

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If you want to speed up A/R collections or sell invoices to boost liquidity, Kema’s A/R automation software and invoice financing services might be perfect for you. Contact Us, we're always happy to help!

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