Small and medium sized businesses find the post-Christmas quarter particularly challenging each year, with the traditional seasonal dip in cash flow making it more difficult to meet outstanding liabilities on time.
However, there are ways to avoid the anxiety that comes with the approach of the end-of-February BAS deadline.
National working capital solutions specialist, Scottish Pacific has been dealing with enquiries from SMEs looking to fund growth after the post-Christmas lull, or in some cases, looking for funds to meet their BAS commitments while they wait for outstanding invoices to be paid.
With small businesses already owing approximately $10.6 billion to the tax office (Australian Taxation Office 2012-13 annual report), cash flow at this time of year is a real concern for SMEs, according to Scottish Pacific's head of product development, Mr Wayne Smith.
Mr Smith explains it’s not uncommon for successful businesses experiencing high growth to run up ATO debt because they don’t have the real estate to help them secure traditional bank facilities and they simply aren’t aware of alternatives such as debtor finance.
A Scottish Pacific survey of more than 500 Australian SME owners in 2013 revealed that cash flow was one of their top three concerns. SMEs are constantly seeking flexible finance solutions to offset cash flow issues.
According to Mr Smith, many SMEs may not have raised invoices from December 20 to mid-January, meaning cash receipts into their bank accounts will be seasonally low around the end of February and into early March. Even strong, well established businesses can find themselves tight for cash to meet their February Business Activity Statement payments.
Scottish Pacific’s 8 tips to help with cash flow
1. Speed up the collections cycle: Improving debtor days - the average time taken by customers to pay invoices - can have a dramatic impact on cash flow. For a business turning over $10 million, reducing debtor days from 60 to 55 days achieves a cash inflow in excess of $135,000. Debtor days can be reduced by making sure invoices show all the relevant information required by the customer to make payment, sending timely reminders and putting in place a disciplined reminder call program.
2. Take deposits on large orders so that there is no need to outlay for large production costs upfront.
3. Consider all working capital options including debtor finance: Debtor finance involves taking an advance on money that is already owed to the business. Ideal for businesses that sell to other businesses on standard trade credit terms, debtor finance is particularly useful for labour intensive businesses where wages have to be met well ahead of payment receipts.
4. Closely monitor stock to maintain optimum levels: Having too much stock on the floor can impact and deplete available cash reserves. Stock at risk of becoming obsolete should be sold off – even cheaply – to turn it into cash.
5. Negotiate with suppliers for longer payment terms to retain cash in the business.
6. Consider offering clients discounts for early payment, trading off against a potential reduction in borrowing costs.
7. Assess whether it is cost-effective to restructure borrowings; one could remove the reliance on real estate security by taking out facilities such as debtor finance.
8. Consider trade finance, a working capital tool available to importers that provides capital to bridge the gap between paying suppliers and getting paid by customers.
Access to working capital is key for SMEs
Mr Smith said the ability to manage cash flow is crucial to SME success, as is access to working capital. He observes that finding working capital to fund the growth of a business is the primary reason SMEs seek out Scottish Pacific.
Debtor finance provides a flexible cash flow facility that can pay a business up to 80% of the value of its invoices within 24 hours, with the balance provided on payment by customers.
Over the past 25 years, debtor finance has become a mainstream funding option for SMEs in Australia, with the take-up accelerating significantly over the past 10 years. There are currently more than 4500 Australian SMEs, with combined annual revenues of $65 billion, using debtor finance.
The latest figures from the Debtor and Invoice Finance Association of Australia and New Zealand (DIFA) indicate that debtor finance provides an estimated $7 billion in credit lines to Australian businesses, up from around $3 billion a decade ago.