Are you having trouble managing your working capital, or do you have to tap into other funds in order to pay business expenses? Are bad debts constantly throwing your invoicing system into disarray? These questions are important when you are trying to close the cash gap.
Regardless if you’re a start-up, an established SME or on your way to being a fortune-500 business, finding the right financial solutions for your business can be a challenge.
A recent survey completed by cloud accounting provider, Reckon, saw that more than 50 per cent of SME owners used personal credit cards to cover financial gaps in their business. Yet owners who don’t read the warning signs and continue to cover operations costs could find themselves in debt, unable to execute their growth strategy or sell their business for a profit.
While there are a number of funding options available, we are facing abnormal economic conditions which may impact the ability to access funding. SMEs now have opportunities to look at various lending streams and concentrating on financial channels and processes which help cover short term cash flow problems with realistic expectations.
Don’t let money management be your downfall. In our last article of our cash flow series, Exit Advisory will examine six proactive strategies used to help SMEs accelerate revenue coming in and slow down money going out.
Be sure to catch up on our previous articles.
Seize Control of your Accounts
Step one is to closely analyse your accounts. If you have numerous unpaid invoices on file, there is a lot you can do to tighten up internal procedures.
Are you tracking your out goings? As part of your business strategy, you should have control over the visibility of your financial data. This way, you can forecast your future income as well as spot cash flow problems before they happen, allowing you to take preventative steps to prepare for upcoming shortfalls.
Rather than chasing revenue to prepare for such a shortage, you can smooth out the process by slowing down your spend when coming up to a financial pinch. Try negotiating a longer payment term with your suppliers, allowing a little more flexibility should your clients also get delayed.
Personal and Business Loans
If your cash flow problems require a little extra help, there are external options available to alleviate any shortcomings. While banks can often be a little restrictive, they are often the first place business owners look, given there are existing relationships. But there are some viable options should you not get what you need from the bank.
If you’re the primary business owner, it could be worth looking into a personal loan to finance company expenses. However, while providing accessible long term repayment options, personal loans generally have higher interest rates. As well, there’s an added risk of tarnishing your personal credit score should things take a turn for the worst.
Another option is an unsecured business loan. This is a short-term loan (usually between 3 to 12 months) that can provide the necessary financials to cover equipment purchases, operations costs and bills. You don’t need to put down any collateral, however it also comes with a higher interest rate that can affect your profitability. This can flow on to effect your business valuation, especially if you have trouble making repayments.
Of course, it's important to get the right financial advice before moving forward on any loans. As with anything, there are pro's and con's that need to be considered.
Lines of Credit
Very similar to a credit card, a line of credit can be used to pay business expenses at any time. There are restrictions on funding limits, but for the most part, it’s an easy and effective solution which won’t affect your business valuation - providing you adhere to the regular payment schedule. You’ll be able to access funds as you need them, as well as pay interest only on the money you’ve drawn.
Also known as debtor finance, invoice financing allows you receive your payment within 24 hours of issuing an invoice. This enables you to use the company’s accounts receivable as collateral. Issuers will give you up to 80 percent of the invoiced amount to use when invoices are stacking up and your debtors aren’t paying on time. Once the client has paid, you’ll receive the balance owing to you.
It’s a fast and relatively easy way to get the funds required to cover your costs and expand as per your business growth strategy. The thought is, as your business continues to grow and increase in sales, the less debtor finance will be required. It makes it a great solution for small or young businesses looking to survive long term, or simply get over a challenging period.
According to Dun & Bradstreet (DNB), there’s a strong correlation between the age of a company, late payments and business failure.
Their Predictive Indicators and Failure Score methodology identifies early warning signs of businesses in financial distress. Over 90% of organisational failures exhibit deteriorations or fluctuations in payment behaviour 3-6 months before bankruptcy. Furthermore, companies with cash flow pressures will pay less important suppliers slower (or not at all). If you are one of these suppliers you may be one of the last to know, and you may also find yourself going under as a domino effect.
Invoice financing does offer a way to smooth over working capital and offer a sustainable cash flow solution for future growth.
Depending on the industry, your business could benefit from hire purchasing. Think of it as renting a car, but for machinery, industrial equipment and computers.
What you rent is owned by the supplier until the end of the agreed period - similar to buying a phone on contract. Once your term is complete, you have the choice of keeping, selling or entering into a new finance term for new materials.
Outsourcing Accounts Receivable
Sometimes it takes an outsider opinion to provide necessary action. By letting a designated company handle the accounts, they can effectively overhaul your payment system, chase down late invoices and provide you with up-to-date financial data.
Rather than hampering your cash flow, you and your provider can enact any changes immediately, saving you stress and leaving you to focus on your growing your business.
Outsourcing your accounts receivable allows for professional help with the added bonus of lowering costs. Your business can minimise the hourly costs associated with self-management. You’ll save both time and money without having to employ a full-time accountant and improve your cash flow position in the same turn.
Restricted cash flow is one of the biggest factors holding small businesses back from sustainable expansion. With over 40 per cent of business owners failing due to money challenges, it’s a problem that affects a staggering number of Australian SMEs.
Every industry has unique cash flow needs, and solutions can be tailored specifically. It’s important to work with money management experts to ensure you’re getting the best possible advice for your business.
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