Balancing Cashflow

Day-to day-operations - and sometimes even survival - can all come down to how we're able to manage the inflow and outflow of cash: our cashflow. So how can SMEs better manage their businesses' cashflow?

Most businesses strive to turn a profit - after all, that's why most of us have taken the plunge and gone into business for ourselves! It can be hard graft, and certainly a challenge. If you don't have the working capital to conduct business activities, how are you going to survive?

While often the bane of start-up operations, even the most established and profitable companies are also susceptible to problems managing their cashflow. Indeed, successful companies that are fast-growing are most vulnerable. The cost incurred to launch a new product, undertake an advertising campaign to generate leads or even win a new tender can take time to recoup through sales; which can be the perfect recipe for a cashflow crisis.

A fine balance

Managing cashflow is a balancing act between your receivables and your payables. And if you've not already realised, managing cashflow can be hard work. The reason? It's because as soon as you engage in business with another company, you are automatically affected by their cashflow priorities. And guess what: they'll be looking after number one first!

But there are several tactics at your disposal to improve your cash situation:

Operate a tight set of purse strings - Reduce the amount you spend each month, without affecting your income, and you'll naturally improve your cash situation.
Reduce the levels of stock-on-hand you are holding - Lower stock levels will mean less exposure to shrinkage, storage costs, spoilage and other expenses. Most importantly, unsold stock ties up valuable cash - so ask yourself: can you reduce stock-on-hand without impacting sales?
Improve the management of your receivables - This starts with how you invoice sales - for example, how fast are customers being billed? Make sure invoices are sent the minute they are due; before if possible. Also consider your payment terms: perhaps they can be shortened without causing offence to regular customers.
Tighten up the number of days to settle invoices - Also ensure that someone in your organisation is responsible for the courteous but firm pursuit of invoices, and don't be afraid to take a hard stance with problem clients.
Double the impact of shorter debtor days on your cashflow by doing the opposite with your creditors - The longer you can extend payment terms for your purchases, the more cash you'll have at your disposal. Try to extend existing payment terms as well as negotiate new business at longer terms. When you've negotiated longer payment terms than you are giving to your debtors, you'll see a marked improvement in cashflow.

Capitalising through cashflow funding

During growth phases, or to cover unexpected purchases, your business may need to inject additional funds over the short term. Being able to anticipate any cash shortfall early will position a business to best react and respond - utilising the many forms of cashflow finance options available on the market.

Overdraft - The traditional overdraft, which you can secure from your bank, has long offered SMEs access to short-term financing. An overdraft will most likely need to be secured against an asset - generally real estate, like your family home or business premises - and offers a flexible line of credit that can be repaid as required.

But cashflow finance has evolved considerably over the past decade from those products typically offered by banks. Lenders now offer a range of tailored products for specific needs.

Inventory finance - Offers SMEs working capital for stock purchases. And unlike many of the cashflow options available to businesses, it does not require stock pre-sales or real estate security. Through providing a cash injection at the start of the cashflow cycle, SMEs' suppliers can be paid upfront for stock purchases, with repayments timed to match the receipt of sales.
Debtor financing - Such as invoice discounting, is another cashflow funding alternative; it provides finance against a SME's debtors once stock is sold and delivered. These debtors are then used as security over the loan. Factoring is a similar facility, but the responsibility for collecting payments is outsourced to a factoring company.

Being able to spot a potential cashflow shortfall as early as possible, and knowing how to react, is key to maintaining a healthy cashflow, especially in times of growth.

Ongoing assessment and evaluation, coupled with reviewing past performance, can also help SMEs plan for the future and forecast - gearing them to best position their businesses for success.

Matthew Nolan is the host of SME Money Makers on Sky Business and has over 18-years experience in banking and finance, specialising in providing finance to SMEs. For more information on financing your business growth visit www.providentcashflow.com.au or call 1800 763 012.

First published: 27 March 2008.
Last updated: 27 March 2008.