Cashflow still a major headache for SMBs

Piggy bank flying through the sky, dropping coins

Australia’s small businesses are being placed under increasing pressure as a result of deteriorating global economic conditions and a continued lack of funding. But there are things you can do to help yourself.

Bibby Financial Services ran its second Bibby Barometer, which measures small business expectations for a healthy business environment, in February, and found that small business expectations continue to worsen.

The barometer, which decreased by six percent from the previous reading in July 2011, is based on intention to invest in the business, expectations of sales growth, ease of managing cashflow, business confidence, and level of business stress.

Cashflow a major headache

Cashflow remains one of the top headaches for small businesses, along with staffing issues, a lack of time to enjoy family life, Government red tape and tax administration. In fact, about a quarter of surveyed business owners said their survival was threatened by cashflow shortages, confirming they had difficulties meeting supplier liabilities and settling their tax payments on time.

There is no doubt it is a tough market for businesses right now. Over the last year, half the business owners surveyed reported delays in payments from their customers, and many expect their payment terms to worsen in the year ahead.

It is not surprising that small business owners are looking at ways to reduce their cashflow challenges. Here are some of the mechanisms you can use to reduce cashflow headaches.

Do your credit checks

Surprisingly, only 20 percent of small businesses do credit checks on new customers, according to our research. Given the increasing challenges of managing cashflow, this is an area for improvement, particularly since over a quarter of business owners had experienced a bad debt in the last year.

So, as a small business owner, it is more important than ever to assess the credit risks associated with selling to a new customer before you close the sale. Financial prudence is fundamental to business survival in the current climate.

More focus on cashflow forecasting

The recent Bibby Barometer showed that one third of businesses surveyed do cashflow forecasts and a similar number do periodic cashflow checks with their accountant or adviser.

A cashflow forecast can help make sure that you have cash available throughout the year or give you advance warning of a shortfall, which can help you negotiate an additional facility with a bank, or alternative source of funding, from a position of strength.

Check out alternative sources of funding

Many business owners are looking beyond traditional sources of funding, with a third more likely to seek credit from sources other than banks in the next 12 months.

It is an ongoing gripe of small businesses that the security requirements for bank loans and overdrafts are excessive. The Bibby Barometer found that 58 percent of business decision-makers think banks require too much security.

It is not surprising that, at a time when bank lending to businesses is difficult to obtain, take-up of factoring and discounting services is growing relatively fast. Debtor finance is growing in popularity compared to other types of commercial lending because it doesn’t require property as collateral and it grows in line with a business. This makes it an ideal form of growth funding for business owners who do not want to risk their personal assets.

Interestingly, our global research shows that SMEs in other parts of the world including Europe, are equally frustrated with their banks. Factoring and discounting has been one of the fastest growing financial products for business worldwide in recent years.

Checklist for accessing a factoring service

So how does a small or medium-sized business go about getting a factoring or discounting facility implemented?

The first step is to contact your accountant or financial adviser for advice, or else go to the Institute of Factors and Discounters (IFD) website for a referral. It’s a good idea to speak to a couple of factoring providers (factors) as this will help you find a good partner that your business will feel comfortable working with. An ongoing close relationship with the factor is important, so check that they demonstrate flexibility and responsiveness.

You will need to be ready to answer the following sorts of questions that the factor will ask you:

  • What sort of business are you in? Factors often prefer businesses which sell a product or service which can easily be shown to have been provided, e.g. by a signed delivery note or timesheet.
  • What sort of debtors do you have? Factors will want to understand the quality and spread of your trade debtors before making an offer of a factoring facility. They will also enquire into your bad debt record, the ageing of your sales ledger and your overall collection performance.
  • How good is your record keeping: the factors will want to make sure that invoices can be easily followed through the collection process.

Within a few working days, if your facility is approved, the factor pays your business up to 90 percent of invoice value in cash, normally within 48 hours of receiving the invoice. The balance of the invoice, less the fee, is paid to the business after a set period, or after the debt has been collected.

Optimism despite the headaches

With all of these headaches to contend with, it is great to see that Australia’s small businesses retain an overall level of optimism. Despite all the challenges of running a small business in difficult economic times, 71 percent remain optimistic about the prospects for their business over the next 12 months.

  • http://www.debtordaddy.com Matt McFedries

    My tip: Get your bookkeeping sorted by using http://www.xero.com then add http://www.debtordaddy.com for automated debtor chasing. Reduced debtors by 90% for some users. Works in AU, NZ and beyond.

  • http://www.smartbusinesscashflow.com Kirsten Clark

    By preparing a cash flow projection you have information to help make decisions in advance of being faced with a possible financial crisis. The economy has been tough these past few years and it’s important to track and understand your cash flow. I have detailed information on Seasonal Businesses and how to set up Cash Flow Projections at http://www.smartbusinesscashflow.com.