BUSINESS Management: Keep it flowing

Healthy cash flow is the very essence of a successful small business. While a weakening economy may put additional pressures on a business, you should always be mindful of your cash flow situation regardless of the economic climate. 

It’s a simple fact that if your cash flow is poor, your business will struggle to operate efficiently. According to a survey conducted by Suncorp, 60 per cent of small business owners said cash flow was an important issue and one in four said it was their biggest issue.

So what are your best ways to manage cash flow? There are three key variants that can impact on a company’s cash flow – your level of sales, your level of expenses and the speed of your working capital cycle.

At the end of the day the most important factor for any business must be sales. If you can’t sell your product or service, you haven’t got a business. So if your sales drop then you need to adjust the other two components of cash flow to try and restore balance (ie, reduce your expenses and chase up your debtors).

If you are a retail outlet then your customers will largely pay cash so debtors will be less of a problem and you should focus more on cutting costs. (Although credit card companies like Diners Club don’t do their small retailer clients any favours by witholding payment for many weeks!)

Reduce expenses

The agility of your business to react to changing sales volumes is critical, says Rob Goudswaard, ANZ managing director, Regional Rural and Small Business. “If you are geared up at a high fixed cost base then there is very little room to move (if sales fall),” says Goudswaard. “You need to ensure that you are structured in such a way that you are not overly reliant on your fixed cost base. You need to have the ability to trim back your variable costs.”

One of the key ways to reduce your expenses is to keep a tighter rein on your inventory. Dan Dredge, executive manager, Small Business Products, Suncorp, suggests you take a look at the frequency of your stock ordering – there’s no point having money tied up in stock you are not selling as readily as before.

Chase up debts

Slow payers can be the bane of any small business, particularly when your creditors are chasing you for payment. Many small businesses fall foul by tolerating 90-day payments from their debtors while willingly accepting a 30-day cycle for their creditors.

The key is therefore to speed up receipt of payments and one way to do that is to offer a discount for early payment. (Some photo retailers offer regular customers payin- advance discount cards for photo prints to achieve something similar.) Of course if you are dealing with big sums then discounting can make serious inroads into your bottom line – for example a 10 per cent discount on a $10,000 account will cost you $1000. But as Suncorp’s Dredge says, money coming in is always more important than money going out.

Making your money work

If your business does have cash sitting idle, such as your GST or payroll tax payments, then make sure that money is working for you. Use a business offset facility if you have a loan or put your money in a high interest bearing account ahead of making your tax payments. If your business offers EFTPOS facilities, then another way to make your money work for you is to make sure your bank settles your EFTPOS daily.

Dredge says the ability to settle daily means you have the money straight away rather than having to wait a couple of days.

Overdrafts

If you are going to run into the red then take a look at an overdraft facility.

Goudswaard says it is the right solution for a business where your cash flow ebbs into overdraft for short bursts of time. However, if you need a fully drawn advance to be repaid over time then a principal and interest loan is probably a better bet.

For some a short-term dip into the red might be better catered for by using a business credit card, although you need to be mindful that you’ll be paying 17-20 per cent interest against just 9 or 10 per cent if the loan is secured.

Relationships

If you are aware your business is running into trouble then one of the first places you should go is to your bank and discuss.

“Banks hate surprises,” says Goudswaard. “The sooner you have the discussion the better. After all, it’s in the bank’s interest as well as the customer’s to solve the problem together. Too often small business tries to keep it a secret from the bank and the first sign isn’t until you overdraw your overdraft facilities. By then you are starting from a suspicious place rather than having the discussion upfront.”

The onus it on small business to understand their cash flow and there are a number of ways to do this through web tutorials, your accountant or bank manager. At the end of the day educate yourself about your business’ cash flow needs and you will be better able to respond to them.  

(This article was supplied by the Australian Bankers’ Association as part of its small business banking initiative: www.smallbusinessbanking.com)