The increased demand for products or services could lead to cashflow problems and even insolvency if a large contract is accquired, Bibby Financial Services - Flexible Cash Flow Solutions ' Asia Pacific CEO, Greg Charlwood, said. This risk may become a problem for more businesses as the economy recovers, with some sectors, such as wholesale, expected to rebound strongly.
“Conditions and confidence for small business has been steadily improving since about March when insolvencies peaked. Companies that reduced their cost base have been able to trade through and conditions are now turning in their favour, with opportunities likely to increase due to the government still spending and interest rates remaining relatively low despite the RBA’s rate rise this week. As the economy continues to improve, Bibby Financial Services expects the problem of ‘overtrading’ to become more prevalent. Overtrading occurs where the cost of delivering a new order exceeds the level of working capital available within the business.
“The danger is that businesses, particularly young or smaller businesses, could feel as if they’ve won the lottery when they receive a large order. But that same order could spell the end of their business,” Mr Charlwood said. The problem many SMEs face is the lack of available working capital. A new order may mean taking on extra staff or purchasing raw materials up front. This all costs money, which sometimes isn’t available within the business and may not be readily available through traditional funding routes. It’s in this instance that invoice financing can provide a much-needed cash injection to help a business to expand.”
Invoice finance, which is also known as debtor finance, cashflow finance or factoring, allows SMEs to release cash from their yet unpaid invoices. Bibby Financial Services helps companies overcome cash flow problems. Bibby can advance up to 80% of an invoice’s value within 24 hours and once payment has been received from the customer, the SME then receives the balance, minus a small service fee. This provides the business with access to working capital when required and a reliable source of funding which grows with sales and doesn’t require real estate security.
“Growing SMEs often become hypnotised by turnover and often ‘overtrade’. They should not forget the cashflow implications of new business and growth and should be placing as much importance on the payment terms as on the order itself,” advises Charlwood. “An old saying is that Cash is King. The reality, though, is that Cashflow is King.”