THE post-Christmas quarter can be a challenging time for SMEs, with the traditional seasonal dip in cash flow making it more difficult to meet outstanding liabilities on time – but there are ways to avoid the angst 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.
“It’s not uncommon for successful businesses, experiencing high growth, to run up ATO debt because they didn’t have the real estate to help them secure traditional bank facilities and they simply weren’t aware of alternatives such as debtor finance,” Mr Smith said.
A Scottish Pacific survey of more than 500 Australian SME owners in 2013 showed that cash flow was one of their top three concerns. Mr Smith said SMEs were seeking flexible finance solutions to offset cash flow issues.
“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; this comes on top of the additional expense incurred in paying for staff’s Christmas leave loading. Even strong, well established businesses can find themselves tight for cash to meet their February Business Activity Statement payments,” Mr Smith said.
8 tips to help with cash flow
Mr Smith said Scottish Pacific had the following tips to help SMEs with post-Christmas cash flow:
- Speed up your collections cycle. Improving debtor days – the average time taken by customers to pay invoices – can have a dramatic impact on cash flow. For example, a business turning over $10 million, reducing debtor days from 60 to 55 days achieves a cash inflow in excess of $135,000. Often something as simple as improving paperwork (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) will help reduce debtor days.
- Take deposits on large orders so that you are not having to outlay for large production costs up front.
- Look at all working capital options – including debtor finance. With debtor finance, instead of taking on additional debt an advance is offered on money that is already owed to the business. Debtor finance is for businesses that sell to other businesses on standard trade credit terms. It is particularly useful for labour intensive businesses where wages have to be met well ahead of payment receipts (it is not suitable for building contractors, professional services firms and retailers).
- Closely monitor stock to maintain optimum levels (dependent on the turnover of the different lines) – having too much stock on the floor means you may have unnecessarily depleted your cash reserves. If you have stock that is in danger of becoming obsolete don’t be afraid to sell it off cheaply to turn it in to cash.
- Negotiate with your suppliers for longer payment terms so you keep cash in your business.
- Consider offering your clients discounts for early payment (the trade off being a potential reduction in your borrowing costs).
- Look at whether it is cost-effective to re-structure your borrowings – you can remove the reliance on real estate security by taking out facilities such as debtor finance.
- Trade finance is another working capital tool available to importers – trade finance provides capital to bridge the gap between paying your suppliers and getting paid by your 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.
“Finding working capital to fund the growth of a business is the primary reason SMEs seek out Scottish Pacific. Growing businesses often find their access to cash tightening, as they need to take on more staff and bring in more stock while still having to wait 30 to 60 days to get paid for goods or services already delivered.
“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 when customers pay.”
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.
Debtor finance provides an estimated $7 billion in credit lines to Australian businesses, based on the latest figures from the Debtor and Invoice Finance Association of Australia and New Zealand (DIFA). This has grown from around $3 billion a decade ago.
Scottish Pacific is Australia’s largest specialist provider of debtor finance services. Scottish Pacific’s growth for the September 2013 quarter was 30% higher than the corresponding quarter in 2012, and well above the industry average. www.debtorfinance.com.au
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