Figures published by the Reserve Bank of Australia (RBA) suggest that inadequate cash flow, combined with inadequate capital, is the root cause of nearly 30 per cent of business failures (the primary cause being company management issues).
While balancing the books year-round can be a challenge, there are a number of solutions available to growing businesses to assist with the eternal struggle of balancing cash flow.
Some may seem perfectly obvious; others you may never have heard of.
You might find it best to cast your net widely, see what is out there and then make your decision, rather than going into the funding conundrum with a preconceived idea, as you could be surprised by its effectiveness, flexibility and overall cost.
Perhaps a combination of these strategies will not only help you manage shortfalls in your cash flow, but also help you build a stronger, more sustainable business for the longer term.
1. Get a loan
The major banks have traditionally been a difficult avenue for SMEs to obtain funding through, especially for small, short-term loans to overcome cash flow constraints. Yet there are many other lenders in the market providing funding specifically for SMEs.
“When a small business owner is thinking about access to finance, they typically … talk about the busy summer period or the quiet summer period. They typically are either trying to take advantage of an opportunity or they are trying to bridge their cash flow,” says Prospa joint CEO and co-founder Beau Bertoli.
“We have a product that goes from $5,000 up to $250,000 and we have loan terms from between three and 12 months.”
According to Beau, his company’s average loan amount is $25,000 and the cost of the loan is tailored to the business’ level of risk and the length of the loan.
“If you’re only borrowing money for three months, it could be as little as 6 or 7 per cent that you may pay for such a short period of time,” he says.
Beau says Prospa has lent over $200 million to the SME sector in Australia in its four years in operation, to businesses as diverse as a crop duster, a crane hire company and seahorse breeder.
Another benefit of SME-focused lenders is the speed with which they turn around applications, says Beau.
“Both the application and the decision must be very quick, and it’s very important to business owners that those two things are,” he says. He adds that businesses using Prospa usually receive same-day notification of whether their application is successful, and funds can be received within 24 hours.
2. Use an alternative funding supplier
Speed is also a factor for other funding suppliers, such as debtor finance providers, which effectively use quality invoices as security for funding.
“People can apply online and we will get back to them within hours – probably within minutes – giving them an indication of whether we think we can offer them a facility and what type of facility,” explains Scottish Pacific CEO Peter Langham.
“Just by telling us what their business is and what they are trying to do, we are able to make that assessment. We would rather talk to people and make that assessment before they send us lots of information only for us to turn around and say it’s not suitable.”
According to Peter, a key difference between debtor finance and traditional loans is that a debtor finance application does not appear on the business’ credit rating if the application is unsuccessful.
“Not at all. It’s an inquiry from them, we’ve assessed it and we’ve said no; it’s between us and the client,” he says.
Peter says that of the more than $900 million his company has lent to over 1,700 businesses, most are paying at or well below 1 per cent a month, generally for a 90-day term, although cost structures vary depending on the type of facility taken out, as well as the amount.
“We are quite happy to fund $10,000 to a small business, or a microbusiness if you like, but then we’ve also got clients who have got facilities up to $50 million,” he says.
3. Collect your outstanding invoices
While this is undoubtedly the most cost-effective means of raising capital – collecting money you are already owed – it can be a high-cost option when you consider the time investment sometimes involved in chasing those hard-to-obtain invoices.
Roger Mendelson, the CEO of Prushka Fast Debt Recovery, has these four tips for chasing your outstanding debts:
Have one person in charge of debts
“[SMEs] always need one person in the business, no matter how small the business, to be in charge of this area,” says Roger. “You need someone who is responsible, and who actually wants to take it on.”
Have a thought-out process
“As part of any collection process, there have to be incremental steps at defined periods, and if you fall behind in this, you lose credibility.”
Get on the phone
According to Roger, the phone should be your first port of call, rather than email:
“A crucial step in any internal process is to get on the phone. This is something that lots of people, particularly in this day and age, don’t like doing. They’re much happier sending an email than actually getting on the phone.”
Don’t let invoices get too late
Roger’s most important tip of all is to not let invoices get any later than their due date.
“If it’s seven days trading terms, you’d ring on the seventh day and ask, ‘Is there any reason this account is not paid?’,” he says. “If there is some dispute of some sort, you’re going to know about it early. If they say they’ll pay and they don’t, you then know you have a problem.”
If you allow debt to get out of hand, there’s a greater chance of it becoming bad debt.
“If there’s a very common mistake SMEs make, it’s to hang onto debts for far too long, and there’s a very clear correlation between the age of the debt and the risk of it becoming a bad debt, like people die or move and can’t be found, businesses get wound up, people go bankrupt, all sorts of things can happen,” Roger says.
“There needs to be a final demand well before then, which lets you keep the client, but the client needs to know that this is a final demand and if it’s not paid it will be outsourced to a collection agency.”
4. Negotiate your terms
“One of the biggest problems that small businesses have is cash flow. Large companies don’t seem to care,” says Mikel Lindsaar, owner of web development firm reinteractive.
“I remember the first discussion we had with a very large customer of ours.
“They said, ‘Our payment terms are 45 days after the end of the month that you issue the invoice’. I went, ‘Hang on. If I issued the invoice on the 1st of January, you’re going to pay me on the 15th of March?’. They went, ‘Yeah, that’s
our payment terms’.”
Unhappy with such treatment at the hands of a large corporate client, Mikel decided to negotiate with them, using reason and logic, not emotion.
“I said, ‘Look, we’re not a bank. We can’t afford this. We need better payment terms’. They changed the payment terms for us. We actually, for a long time with that customer, got pre-paid for our work in full.”
5. Diversify your income
It can be surprisingly easy to add additional sources of revenue to your overall product or service offering. Even if these never become incredible money makers, having them in place turning over a slow, steady stream of income can be a great way of managing cash flow troughs in other parts of your business.
For Clare Long of Norgay HR Consulting, this involved developing and on-selling digital tools to help clients manage more of their HR affairs, as a more cost-effective solution than hiring her directly.
Physiotherapist and Pilates instructor Becky Dyer found she could earn additional revenue by creating videos of her Pilates classes and selling them as a 10-week package online.
Other business owners have also found opportunities to make the most of their knowledge and expertise in their field, earning extra money by lecturing students, speaking at industry events or consulting on the side.
6. Keep your costs under control
Easier said than done, it may seem. Yet chances are you are so busy running your business that you’re actually overlooking many potential cost efficiencies. For example, Bradley Beer, CEO of BMT Tax Depreciation, suggests that many SMEs are failing to claim their full share of depreciation deductions on the commercial premises they occupy as either owners or tenants.
“Business owners may need to fit out a premises with assets such as air conditioning, security systems, telephone systems and furniture such as desks, chairs and kitchen facilities,” he says.
“Security systems may cost around $6,100, attracting a first financial year deduction of $2,440, and telephone systems may attract a $454 first-year deduction.
“Whether you own or rent your premises, or even if you work from home, there may be a wealth of unexpected and value-laden deductions you are entitled to.”
Another means of cost control is automating your systems. Areas such as stock acquisition, travel and entertainment expenses, company vehicles and accounting can all be automated, allowing you to track incomings and outgoings and remove human error from your calculations.
7. Help is at hand
First and foremost, if you are feeling swamped by the challenge of managing your cash flow or think you may be in strife, get help. The solutions above outline just some of the approaches you can take to better manage those tricky cash flow situations.
It can also be worthwhile to discuss any cash flow concerns you have with your accountant. After all, they know your business figures just as well as you do, if not better!
My Business asks: How do you manage your business’ cash flow?
Paul Glossop, Pure Property Investment
“I personally pay myself a very measly salary, and the intention there is that … I want the cash flow to be decent for the short term. I still drive a 30-year-old car, I’m happy to admit it. If I’ve got [capital], I’m going to use it and spend it. It’s having confidence to say you’ve got to be able to spend it and you’ve got to spend it in the right way, so having the right support staff around you to be able to say where you should be spending this money, if at all.”
Michael Lavilles, Beyond Travel
“Because we operate on very narrow margins, our retained earnings is basically what we use to grow, and that is very small. We are seasonal, and we’re a northern hemisphere-tied company, so it depends on the summer of the northern hemisphere. During November to February we’re very quiet, so our cash dips around that time. What [American Express] offered was that I could use my credit card to pay my suppliers to keep me going through those months, and because of the term, which is 51 days, last year alone that really helped me a great deal to keep the company going.”
Danielle Sweeney, Calligraphy Supplies Australia
“Purchasing stock and bringing that in from all parts of the world is really tricky. I pore over my books and my accounting software constantly to see what I can afford, how I can service loans, how I can keep things growing. Working on a shoestring is tricky, because you can always put so much money into all the different pieces of the pie, until the pie is finished.”