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Cashflow 101: the King and I

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Cash is king… and no one except Elvis is likely to disagree. So why don’t we ever have enough and how can we fix cashflow problems without selling off part of our company?

By Matthew Nolan

While the years and numbers have both gone up, the need for these fundamental cashflow management skills remain the same.

Despite a natural focus on profitability, successful business owners have learnt that you can’t spend profits – you can only spend cash. Profits are important, but will your business have the working capital to make it to year end?

Even the most successful companies have problems managing their month-to-month cashflow. This particularly holds true for high-growth companies, whether as a result of launching a new product or service, winning a tender or a successful new ad campaign. While making more sales may be every business owners dream, it can quickly turn into a nightmare when a cashflow crisis occurs.

WHO’S THE KING?

Simply put, cashflow describes the shift of cash in and out of your business. Cashflow includes regular outgoings, such as salaries, the purchase of stock, rent, etc. Outgoings also include less frequent items, such as payment for purchasing a new computer, if paid from the business’ cash resources rather than financed.

Cash inflows include revenue-generating activities such as sales and interest income, but also include capital injections and the proceeds from loans.

The outstanding portion of your business’ cashflow has two sides. Firstly, your receivables, such as invoices issued to your customers but not yet paid. Secondly, there are payables, which include amounts owed by your business for the purchase of inventory, services, etc.

LONG LIVE THE KING

Cashflow is the lifeblood of your business and managing it is fundamental to sustainable long term success. Effective management of your cashflow requires regular time and care each week, rather than waiting until your creditors are harassing you before following up on those slow payers.

Your business’ cashflow cycle tracks the time taken to convert your payments for stock purchased into sales, invoices and ultimately cash. The longer the time frame, the more cash your business will require to complete a cashflow cycle.

The cashflow cycle can be shortened through investing in R&D to cut production times or choosing alternate freight options that reduce the time your goods are in transit.

To extend the life of your business’ cash, old fashioned frugalness can go a long way. Consider any purchases in light of potential future cashflow constraints, while always seeking savings through negotiation, shopping around, buying second hand or avoiding non-essential costs altogether.

The level of demands placed on your business during the cashflow cycle can also be reduced through minimising stock levels to those absolutely necessary at any given point in time, thereby reducing stock holding costs, spoilage, shrinkage, storage, handling and insurance costs.

RECEIVING THE KING

For most businesses, the effective or ineffective management of receivables will have the single biggest impact on cashflow. Timely invoicing to your customers is essential – sending these electronically will ensure your invoice is not only received earlier than via snail mail, but will provide a record confirming the date it was sent.

Proactive but courteous follow up of payments will reduce your number of slow paying clients. While most of us would be reluctant to consider the possibility that customers won’t pay, if the worst does happen, don’t be afraid to utilise the services of a reputable collections agent or pay a visit to the small claims court rather than leave a debt owing almost a year, or worse, writing it off.

To provide an incentive for early or prompt payments, you may like to offer modest discounts off your invoice amounts. However, compare how this stacks up to opportunities available through borrowing. Another way to provide a similar incentive is by charging penalties for late payment, although this may be difficult to enforce on good customers.

For large orders, it is common practice for many companies to ask for deposits, but be mindful of potential GST implications following the ATO change earlier this year, which requires businesses to adjust their GST calculations on part payments for orders, typically deposits of 10 percent or more. This means that for the many businesses that account for GST on a non-cash basis, receipt of a part payment requires remittance of the GST on the full value of the order, even though full payment is yet to be received.

A RELUCTANT FAREWELL

Managing payables, particularly for fast growing companies, can be equally overwhelming, as increased purchases mean greater outgoing cashflow demands. To improve your business’ payables, ensure you’re taking full advantage of available creditor payment terms, including regular negotiations to extend these where possible… don’t be afraid to ask!

Carefully consider any creditors’ offers of early payment discounts, as they may be more expensive to your borrowing costs. There is also the hidden opportunity cost of not being able to utilise the funds in your business during that time. Your payments should also be diarised and prioritised with payments made by electronic funders transfer, so that payments can be made on the latest possible due date and recorded.

CHOICES FIT FOR A KING

Anticipating future cashflow shortfalls does not spell the end of your fast-growth business. An increasing array of cashflow finance options are becoming available in Australia.

The most common of these is a traditional overdraft, which is available from your bank and is typically secured against real estate, such as the family home or business premises. It provides your business with a flexible line of credit that can be drawn and repaid as needed.

A more recently launched option is inventory finance, providing working capital for your stock purchases. Uniquely, inventory finance is available without any requirement for real estate security or stock pre-sales. Inventory finance provides a cash injection at the start of your business’ cashflow cycle, by paying your suppliers upfront for stock purchases, with repayments timed to match cash receipts from your sales.

Debtor finance, such as invoice discounting, is another alternative that provides finance against your debtors, once the stock is sold, invoiced and delivered. These debtors are then used as security for the loan; naturally this doesn’t suit retailers who don’t hold debtor accounts. Factoring is a very similar facility, except that responsibility for the collection of payments from your customers is handed over to the factoring finance provider, which suits some businesses but not others.

PLANNING THE KING’S SCHEDULE

Cashflow planning is essential to develop the necessary capital strategies required to fulfil your business’ working capital needs. Recording and then reviewing your past year’s cash flow statements will enable your business to make more reliable cashflow projections for the coming months or even year.

These projections aren’t to impress your accountant, they’re produced to assist you identify potential problems in your cashflow cycle, as almost every business experiences excess cashflow requirements at some point.

The key to managing cashflow shortfalls is becoming aware as far in advance of any future problem and then knowing how to either avoid them or raise more cash in a timely and suitable fashion.

6 “NO-BRAINER” TIPS FOR MANAGING CASHFLOW

Payables

  • Take full advantage of creditors’ terms (pay your bills on the last day that they are due and avoid paying interest on monies borrowed).
  • Negotiate, negotiate, negotiate (extend payment terms, where possible – from 14 to 30 days, from 30 days to 45).
  • Consider carefully offers to pay upfront to receive a discount (you might end up paying more, when measured against bank interest rates).

Receivables

  • Reduce the amount of time between the purchase or production of goods, the time of invoicing and the date of payment.
  • Offer discounts for upfront payment (but don’t offer discounts above the interest rate you are paying, to avoid going backwards).

Matthew Nolan is managing director of Provident Inventory Finance, a specialist lender offering Australian businesses the resources to grow beyond their current cash flow constraints, funding the purchase of additional inventory for manufacture or resale. For more information on financing your business growth visit www.inventoryfinance.com.au

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