Some Answers to Business Cashflow Stress

“Cash Flow is King” for all SME’s all of the year but these woes are more common at the start of a new year, with SMEs often struggling to meet commitments in January and February.

But there is a range of ways to improve your situation.
Julie Andrews, Managing Director of Nova Finance Group, says having a cash flow budget in place is a good start and that SME’s need to monitor cash as it flows through a business.

“Actual results should be continually compared to the budget. Budget versus actual reporting should identify potential cash flow issues and give the Managers an early ‘heads up’ to any looming cash flow crunch” Ms. Andrews says.

She also offered some other Tips:
Invoice Finance - Business Cash Flow Tips

1. Control and Possibly Reduce Inventory
One way to improve cash flow is to reduce the amount of working capital tied up in funding the trading cycle. This can release a significant amount of working capital Ms Andrews said.
One option is to order more regularly and adopt a “just in time” mindset in controlling inventory. By ordering more frequently and holding less inventory you reduce your working capital requirements and free that capital for other purposes.
A review should also be made of the stock items that are moving. Make sure you have sufficient to meet demand but sell slow moving stock and reduce the amount of stock on hand in those lines.
If you need to, mark down prices to move that stock out the door, it will pay dividends in the future.

2. Closely monitor your accounts payable and consider all options
There are a several options available to SME’s to extend the payment cycle or to interpose another step in the payment cycle to preserve capital.
Most businesses have company credit cards and Owner/Managers usually have more than one credit card. These can be used to pay suppliers and in some cases achieve an additional 55 days to pay, thereby preserving working capital.
Just make sure you don’t get caught in the trap of paying credit card interest because you can’t pay the credit card bill when it is due.
“This can be a great tool” Ms. Andrews said but make absolutely sure that payment of the credit card is programmed for the due date. Don’t be LATE!
If you are smart, it’s free working capital.

How much cashflow from unpaid invoices

3. Don’t finance your customers business
Don’t be a patsy and let customers drag you out because you are a “Nice Guy”
“The big end of town are the worst offenders” Ms. Andrews said. They usually think that because they are big they can pay when they want to. The other culprits are so called “Mates” taking advantage of your capital.
Some business is just not worth having if payment can’t be relied upon.
Ms. Andrews said, ”In planning your business strategy don’t become overly reliant on one large customer. If you lose that customer, for whatever reason, you may lose everything”.
“In our business, we see in finance lots of clients and some of them chase business with large customers, often multi-nationals” Ms. Andrews said; “The starting point seems to be they want to screw the price down to at best a marginal proposition and then want 90 and even 120 day payments terms to boot. It’s a simple truth that some business is not worth having so be smart and concentrate your efforts where the rewards are greatest.”
4. Collect Your Debtors
Reducing the number of days it takes to collect your debtors (your unpaid sales invoices) can make an enormous difference to your working capital availability.
The longer it takes to collect your debtors, the less capital you have, the more it costs you to do a sale and the less net profit at the end of the year.
If your average debtor days (time to collect) is 60 days and your annual turnover is $5M, you will release over $200,000 into your business if you can reduce your average debtor days to 45 days.
That’s a free capital injection into your business.

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5. Invoice Sales Every Day
It’s amazing how many businesses don’t invoice daily.
The less frequent your invoicing pattern, the more likely invoicing will be missed altogether and the longer it will take to get paid in the end.
There are lots of different technology options to enable businesses to invoice on site and right away. Use technology to make your life easier, to ensure that everything that should be invoiced is invoiced every day on the day; and help speed up the collection cycle.
6. Spell out Your Payment Terms
“It really surprises me how many businesses that become our Clients don’t have a Customer Credit Agreement and don’t even have agreed payment terms spelt out” Ms. Andrews said.
We ask “do you know who your customer is” and they generally reply, I’ve know Fred for years but when you ask is it Fred Smith (as a sole trader) Fred and Mary Smith (as a partnership) or Fred Smith Pty Ltd (as a company) or Fred Smith as Trustee for the Smith Family Trust, we are usually met with a stunned silence and then “ Ummm, I dunno!”
It certainly makes a difference if you have to collect and it certainly makes common sense to have a Customer Credit Agreement with specified payment terms. If you want to extend some latitude you can but at least all parties have a starting point.
Extending credit terms is one of the dumbest “sales strategies” we see and it almost always ends in tears.
7. Make Sure You Know “Cash is King”
Quite some time ago a prominent businessman (who will remain nameless) said “you can’t go broke making a profit” ,….. well … He Did!
His cash flow slowed and then dried up, and then his Bank put pressure on him because his cash flow was not what was projected.
They had heaps of assets and a good business but no cash flow! The game was Up!
“Many talented and skilled businesses with great projects have failed through poor cash flow management”.

Cash is King. Never forget it!

Nova Finance Group offer cash flow and working capital solutions to SME’s or all kinds around Australia.
Nova can assist start up’s and growing business as well as businesses that are experience short term cash flow distress.
For an obligation free consultation with a Cash Flow Finance Expert, phone 07 3870 3111 or email

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