This is the million-dollar question for so many start-ups, and also a burning issue for most SMEs.
The answer comes down to three key pressure points, and how entrepreneurs deal with these points can have a huge impact on whether their business grows, or fade into the quiet of the night.
Pressure Point 1: Slow collections
It’s crucial to eliminate slow collections from the business. This is one area where you cannot have a “wait and see” attitude.
According to Dun and Bradstreet, the average debtor days for Australian SMEs is 52 days. That’s a long time to be without money in a small business. To put this quite simply, say your debt turn is 60 days, and your turnover is $1 million per annum – this means you are missing out on $22,000 in your business.
It is important to be aware that each industry has its own average debt turn. This kind of information can be sourced from organisations such as Dun and Bradstreet and the internet.
It is possible to get your debt turn down below industry average by using best practice collection techniques. Speed up payments by being methodical and time-sensitive when raising invoices.
We recommend to clients that they issue the invoice as soon as the job is done or goods are despatched. If possible, don’t wait until the end of the month.
Also, make sure customers find it easy to pay you. Invoices should include all relevant details, such as the customer order reference, the date payment is due, your bank details, who to contact if there is a query and a full description of the goods or services provided. This will minimise the back-and-forth that could happen with unclear invoices.
Ensure you credit check potential of existing customers. There’s no profit in a sale unless you get paid (and on time) and the best way to ensure this happens is to run regular credit checks – at least every few months.
2. Tight terms with suppliers
Many suppliers expect 14 day or 30-day terms, and this can cause real cash flow issues for a business (especially if you haven’t yet got on top of slow collections).
Put in the time to give your major suppliers a really good understanding of your business. This will involve sharing an insight into your plans and a brief overview of your cashflow forecast to show how it all works for both you and the supplier.
Get to know the business owner and the decision maker in charge of such decisions. Then, build the love – keep to all commitments wherever possible and let the supplier know beforehand of any hiccups in your payment plan.
Try to stretch out their terms to 30 or 45 days. With a supplier who supplies maybe $500,000 per annum, this delay would put $21,000 back into your cashflow.
3. Struggling with the cashflow cycle
Different funding solutions will suit different situations. For example, a business with customers that pay in seven days probably isn’t going to need a cashflow finance facility.
They may however need an overdraft to meet additional cashflow needs caused by a spike in orders or a large customer paying late.
A business with 30-day terms (read 50 days!) will however need a facility such as factoring to meet the needs of the business when there is a stretch in their cashflow cycle.
It’s not uncommon for start-ups who offer 30 day terms to have two months’ worth of sales caught up in debtors.
For most start-ups, unpaid debtors are their main cashflow problem, so why not use these debtors to solve the problem?
Consider a cashflow finance facility that would free up 80 percent of debtors.
Factoring is a line of credit secured against accounts receivable. Also known as invoice finance, debtor finance, cashflow finance and invoice discounting, it is a form of finance that provides access to working capital that would otherwise be tied up in receivables for 30 or 60 days or more.
A business invoices their client directly, and uploads the invoice to the factoring provider.
The provider will, typically within 24 hours, advance up to 80% of the value of approved invoices, less fees. The remaining 20% becomes available to the business when the invoice is paid in full.
Factoring is available to businesses that sell products or services to other businesses on standard trade credit terms. It is a smart way to fund business growth and expansion, and a particularly good solution for businesses that are turning away orders and forgoing growth opportunities they can’t fund.
This style of debtor finance works best in industries such as temporary labour hire, transport, wholesale/distribution, recruitment, manufacturing, business services and printing. It is not suitable for building contractors, professional services firms and retailers.
Factoring facilities are self-liquidating. Instead of taking on additional debt, an advance is offered on money that is already owed to the business. And unlike most overdraft facilities, factoring does not require real estate security.
It is a growth enabler, enhancing cash flow to fund extra staff, additional stock or capital expenditure.
Greg Charlwood is general manager of national cashflow solutions specialist FactorONE. A passionate supporter of SMEs, Greg has established and managed some of the major debtor finance businesses in Australia and twice chaired the industry body DIFA.
