MT Expert - finance: Get back to black

Cashflow is a permanent headache for small businesses. Here's how to avoid the pitfalls and get some cash back in the coffers.

Recently we’ve seen blue chip companies ask their suppliers for rebates without prior consultation or agreement. This phenomenon affects businesses across the board as the prerogative to cut costs is passed on from one supplier to the next. What’s more, sudden changes in terms can be overwhelming for SMEs who are still struggling with delayed payments and cashflow.

More than one-third (38%) of small businesses have had cashflow problems during the past two years of economic downturn, according to new research from IGF’s ‘Small Business Survey 2010’. Despite past efforts of governments to introduce late payment interest, debtors paying late remains a primary factor (56%) in small businesses’ struggle for liquidity. The simple fact is that the measure lacks effectiveness as the SME market is frightened to lose valuable contracts with major customers should they try and enforce it.

Seasonality compounds the issue too. The run-up to Christmas is one of the most crucial times of the year for cashflow. Payments from customers often slow down and accounts payable teams take time off work to spend it with their families. As a result, payments often don’t get made, cheques don’t get signed, and small businesses can experience real problems. Besides, with corporation and personal taxes due in January many business owners are in a financial bind on their holiday return. Therefore many firms resort to costly bank overdrafts to see them through or, worse still, the company credit card – to provide much-needed liquidity.  

It is more important than ever for SMEs to look into the different borrowing options available to them, so as to ensure that they find the best fit for their business and current financial position. Most owner-managers of small companies use overdrafts, bank loans or equity funding to finance their growth. However, these traditional options are becoming more expensive and, in some cases, may no longer be available. Hence SMEs need to find new potential sources of finance. One solution is invoice finance, which involves borrowing money against your sales ledger – not external assets like directors’ properties. In practice, it means cashflow situations improve with every new customer signed.  Invoice finance is also considerably cheaper than a comparable overdraft charged at 1% to 2% per month.  

Here are my top tips for improving your cashflow:

1. Plan, plan, plan. Prepare cashflow projections for next year, next quarter and, if you’re on shaky ground, next week.

2. The key to managing cashflow is to be aware of any problems as early and as accurately as possible. Financial services providers are wary of borrowers who suddenly need to have money today.

3. Finance problems can often be self-inflicted. It seems obvious but companies which send out incorrect invoices often find that their customers end up returning an invoice and requesting a new one.

4. Protect yourself against bad debts. Bad debt protection cover provides clients with protection for up to 90% of any loss suffered by reason of the failure of a debtor to pay, owing to insolvency or protracted default.

5. Balancing credit terms vs cashflow needs is something many businesses struggle with. Be sure to tell your potential customers upfront about your credit terms - before you provide your product or service.

6. Don’t always associate higher sales with better cashflow. If large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash.

7. You may be able to raise cash by selling and leasing back assets such as machinery, equipment, computers, phone systems and even office furniture. However, you could lose your assets if you miss lease payments.
Tracy Ewen is managing director of finance company IGF

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