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Preparing for the traditional Christmas cash flow squeeze

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Bibby Financial Services - Flexible Cash Flow Solutions  advises business owners to be extra vigilant in managing their working capital and monitoring cash flow during the Christmas trading period to avoid the traditional cash flow squeeze in the New Year.

According to Gary Green, Director of Bibby Financial Services Australia, trading conditions this Christmas are likely to be difficult, given the weak retail figures, a string of major insolvencies, a slight rise in unemployment and tightening of credit and bank overdrafts. He notes that the average small business now waits almost twice the standard 30 days for payment of invoices and business insolvencies are still relatively high, partly because of the ATO’s reduced tolerance of tax arrears and a general tightening of trade credit from suppliers.

Therefore, it is important for companies to start preparing now to cover costs and maintain strong cash flows when business is traditionally quiet. Cash shortages can be anticipated during the Christmas holidays when accounts staff are harder to contact and many businesses work on skeleton staff. This can cause serious cash flow issues next year such as paying the first tax bill in the New Year.

Mr Green singles out fast-growing young businesses as ones particularly at risk since these companies do not prioritise sound credit control procedures though they are the most hungry for cash flow funding. Overtrading, for instance is a key risk for these businesses, which results in blowouts in payables and receivables and increased financing costs that squeeze margins. In such situations, the business may need to reduce sales or investigate ways to fund working capital to better align sales with production/ fulfilment.

How to ensure a reliable cash flow: Debtor finance

Aside from bolstering processes and procedures, invoicing early and often, and running credit checks periodically, there are a number of funding tools available besides the overdraft that can help to ensure reliable cash flow in such situations. 

Debtor finance, also known as invoice financing or factoring is rapidly becoming an important funding tool for Australian SMEs. According to the Institute for Factors and Discounters of Australia and New Zealand, debtor finance helped fund over $62 billion in B2B sales nationally in the 12 months to June 2012, mainly due to the growing awareness and acceptance of this form of financing among business owners and their advisers.

Debtor finance is effectively a line of credit extended against the business' receivables, often one of the largest current assets on the balance sheet, and which allows a business to quickly convert its unpaid invoices into cash.

In a typical facility, the lender (or ‘factor’) will advance about 60-80% of the face value of the business' invoices within 24 hours, with the balance returned to the client on payment by the debtor. In some cases the lender also provides an accounts receivable service, helping to save time and accounts receivable cost. Some lenders can set up such debtor funding facilities within several weeks.

Mr Green explains that debtor finance is a versatile funding arrangement, suiting a wide range of businesses and industry sectors from small start-ups to established listed small cap companies, and from manufacturers and wholesalers to business service providers. However, retail, construction and IT-related services are not suited to debtor finance.

Although slightly more expensive than other funding facilities on a straight comparison of interest rates, debtor finance delivers significant benefits of strong cash flow to the business from more streamlined operations, less reliance on discounts for prompt payment, reduced accounts receivable cost and the ability to take advantage of opportunities more quickly. 

Key benefits of debtor finance:

  • Does not require property security, minimising directors’ risk
  • Funding grows in line with sales, matching the business’ working capital requirements
  • Reliable cash flows provide the stability and confidence required to implement longer term strategy
  • Less time and resources spent on debtor management
  • Existing loans can be paid down or extinguished
  • Prompt payment of suppliers improves relationships with creditors
  • Higher funding level can often be accessed, compared to other sources of funding
  • Discounts provided for early settlement can be reduced or withdrawn, improving margins
  • Fast access to capital can allow businesses to take advantage of other opportunities, e.g. accessing prompt settlement discounts, or bulk discounts for fuel
  • Protects the business against cash flow shocks
  • Helps smooth out seasonal peaks and troughs in cash flow
  • Allows competitive terms of trade to be set, without impacting cash flow
  • Can improve debtor days, with closer receivables management
  • Bad debt can be minimised through more disciplined credit management
  • Useful in raising capital for mergers and acquisitions, succession planning and management buyouts

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