Cash Flow: Turning a Problem into a Great Opportunity

Mention ‘cash flow’ to a business owner, and they will likely form a clear word association: ‘Problems’, which may even be uttered out loud.

There are good reasons for business leaders to be wary about their cash flow situation: it is the issue most likely to kill off a small or medium-sized enterprise. However, businesses that take this in hand and actively manage their cash flow situation can turn it to their advantage.

Good cash flow management can be turned into a way of raising significant funds for growing operations and investment. Naturally, this same good management also insures against the terminal money problems that business owners worry about so much. 

Why do Cash Flow Problems Arise? 

A profitable business is one which, over the course of the year, can sell enough of its product to cover its cost, and have a margin left over. Most SMEs do this, but collecting all the money from those sales is another matter.

If a business has a net margin of 10% but at the year end 20% of its invoices are outstanding, the profit it declares is purely theoretical. Until it gets the cash it is due from late-paying customers, the owner is down on the year – and still needs to continue paying bills, wages, and producing the next set of orders. 

At this point, some lucky readers may be thinking that 20% is a lot of invoices to have gone astray. Business leaders in sectors such as construction, manufacturing and the supply chains of large corporations will not be surprised, however: in these areas, and others, business clients regularly take between 30 and 90 days to pay. That is just the routine, deliberate late payments. Most SMEs will sometimes have to deal with a bill that is seriously overdue as well.

The knock on effect of this culture of late payments is that most businesses are missing between 10% and 30% of their annual revenue. In order to make up the shortfall, SMEs take out overdrafts and business loans, paying for debt to cover money that they should have. If they cannot raise enough to cover outgoings – including the scheduled repayments on those very loans – extra charges arise and things rapidly spiral downwards.

Cash Flow Management

While their own customers take liberties with payment times, SMEs have no such luxuries with the majority of their own bills. Wages, taxes, utility bills and rent have to be paid on time, or there will be serious consequences. Therefore it is advisable to have a degree of planning and oversight to ensure that there will be enough cash in the bank to meet all scheduled payments. 

Good cash flow management practices include proactively ensuring you invoice as early as possible, setting clear trading terms regarding payment times, and chasing late payers assiduously. These measures are designed to ensure that a business uses as much of its own money as possible to pay its bills, thereby minimising debt or freeing it up for more productive use.

Cash Flow as a Source of Funding 

Business owners with healthy sales will have noticed earlier that, if 10%, 20% or 30% of annual turnover goes missing to late payers, it amounts to talking substantial sums: the kind of money that could fund investments in growth and efficiency. Really good cash flow management seeks to access that money and put it to use.

What will surprise many is that it is right there for the taking: invoice finance is a system that offers businesses the bulk of their outstanding invoices up front, for just a small fee. In fact, it isn’t even new: invoice finance has been in use since at least Roman times, because merchants always saw the opportunity inherent in their missing money. However, it is a bit easier to arrange now that fintech methods have brought it up to date.

In an age when business finance can be hard to come by, the potential of this funding method is huge. By turning SME’s worst nightmare into a huge opportunity, the full potential of Australia’s SMEs can be unleashed.

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