SMEs and the cash flow challenge

Cash flow is the single biggest factor that determines the success or otherwise of a small and medium enterprise. Surveys unerringly reveal cash flow as the critical dynamic that makes or breaks smaller businesses, and entrepreneurs often cite cash flow as the biggest barrier to growth.

Traditionally, the cash flow problem is exacerbated during Christmas. Consequently, the time to address it – sufficiently ahead of time – is now in the current year-end quarter. Here are some tips to wisely manage your cash flow, (and party hard in the holiday season):

1. Manage your receivables

This is the first, and obvious, step in getting your finances in order. Negotiate hard to whittle down the period for which you grant credit to customers. Offer incentives for early payments and add penalties for late payments so that customers are motivated to pay on time.

Periodically track the payments due to you, and follow up aggressively. This will ensure late payments don’t erode your margins, or cause you to pay higher interest on your own loans. It will also bring a measure of predictability to your cash flow and finances.

2. Manage your outgoings

This is the second key way to optimise your cash flow. Keep a handle on your costs and expenses. Know what is being spent, and when. Be prepared to negotiate hard to win lenient, convenient and flexible payment terms with your suppliers. Closely review what you’re buying or spending, and cut out the unnecessary. Finally, make sure your money is wisely spent and actually contributes to the growth of your business.

3. Identify client-centric banks

No matter how well you manage your business, you will periodically need credit services, which means you need a good bank. Now, no two banks are the same even though many of the products and services they offer may look similar. Many banks and financial institutions are focused more on their own profits, and much less on their clients’ interests.

So find banks that truly believe in win-win outcomes and readily invest in your success, rather than those that simply lend you money or keep your deposits. Make sure they don’t have hidden costs or hefty fees that can eat away your hard-won profits. You might also want to find banks that provide some professional advice with financial planning, taxation and forecasting as well.

4. Pick a high interest savings account (HISA) to make your money work harder

We know you work really hard for your business. But it’s important that your money works just as hard.

Many businesses park their hard-earned cash in regular business accounts that earn next to nothing. It makes no sense to do that – not even for small amounts. Instead, pick a High Interest Savings Account that additionally provides flexible and easy access to funds, and is risk-free. Most HISA accounts are guaranteed up to $250,000 by the Australian government. This will ensure you earn more on your idle deposits.

To achieve these goals, exercise due diligence before picking the bank that is right for you. Check if the bank calculates interest on a daily basis. Make sure you know what the bank charges for withdrawals. Many banks attract new customers with an inaugural higher rate of interest and other concessional terms but roll back to more stringent terms after the first six months. Make sure you know what the actual interest rates and closely study the other terms and conditions that apply after the honeymoon period.

RaboDirect is a division of Rabobank Australia Limited ABN 50 001 621 129 AFSL no. 234700. Read the terms and conditions before making investment decisions.