The importance of small and medium-sized companies for the Mexican economy is generally known, mainly because they represent 52% of the national GDP; in terms of jobs, SMEs generate 65% according to figures from the National Survey of Occupation and Employment (ENOE), INEGI, 2021. This means that many households depend on these companies to exist, grow and prosper.
The numbers don’t lie: SMEs greatly help Mexico move forward, especially after the crisis experienced for almost three years. Adapting to the new context has meant a challenge for companies and Mexicans, but what is permanent is the entrepreneurial spirit, thanks to which new businesses continue to be created that seek to obtain the preference of their clients.
Lack of liquidity puts SMEs at risk
Although this momentum continues, it is necessary to be aware that entrepreneurs have the ability to drive the country and, at the same time, face great challenges when taking that risk.
There are two aspects to this situation; On the one hand, a global study of Harvard Business Review determines that only 10% of SMEs will be more than ten years old; On the other hand, a US Bank study determines that just over 80% of companies fail due to poor liquidity management. It is possible to modify these statistics with a deep analysis of the reasons for failure and with continuous improvement processes to avoid it.
The lack of liquidity is a headache for businessmen because it is an issue that they do not usually take into account. The lack of cash flow is related to the gap between the inflows and outflows of money, almost always caused by installment sales.
What causes this lack of liquidity?
It is common for businessmen to be forced to accept payment terms as part of the facilities they give their clients to participate in their production chains and gain their preference. The problem is the lack of liquidity that this causes and that can mean the definitive closure of the business.
The time that elapses between the sale of the product and the collection date, which is usually longer than the time in which the entrepreneur must meet his payment commitments with suppliers, creditors and collaborators.
If a correct administration of the cash flow is not carried out, the closing point can be reached; For this reason, it is necessary for entrepreneurs to focus on carrying out actions such as selling in cash, especially at the beginning of operations, since it will depend on this that they can meet their payment commitments and maintain the continuity of the operation.
How to deal with the lack of liquidity
One strategy that can help offset the negative liquidity gap effect is trading. More than 80% of credit in Mexico is granted by suppliers. Negotiating longer payment terms allows entrepreneurs to extend the time to make disbursements and have room to maneuver to collect from their clients.
Another option is to obtain financing, which must meet certain requirements to be viable for the entrepreneur. Access to this type of support depends on the guarantees that the company can present, both in material terms and in formality, honesty and legality.
An unusual option is to insert own capital into the company; however, not all entrepreneurs have enough money to cover ordinary and extraordinary expenses.
Liquidity complicates the operation of companies due to the lack of knowledge that exists in this matter. The vast majority of entrepreneurs are unaware of the importance of having control of their business finances. Leaders must be aware of the importance of having the necessary cash to operate. The ideal is to break with the statistics and look for the prosperity of newly created companies.
Claudio Kandel Claudio has also been director of financial products at Banco Azteca, director of credit risk and director of operations at HSBC, brand manager of “Western Union: Money in Minutes” at Elektra, among others. He has extensive experience in the financial sector, both in Mexico and in the United States, Luxembourg, Russia, Switzerland, Israel, Guatemala, Panama, Honduras, El Salvador, Colombia, Peru, Brazil and Argentina.