This article appears in the Jan/Feb 2016 issue of Business Franchise Australia & New Zealand
Healthy cash flow is more than just a sign of a healthy business; it can be a make-or-break factor for long-term success.
While cyclical fluctuations throughout the year can affect cash flow, it is important to make sure that for the year as a whole, cash flow is safely in positive territory.
With the new year almost upon us, businesses should take stock of the previous year’s cash flow status and start to prepare for the coming year. They should learn from any mistakes and make sure they’re doing everything they can to maintain a positive cash flow in the coming year and beyond. Interrupted cash flow makes it hard or even impossible to pay staff, order new inventory, and generally support daily business operations. Some businesses overcome cash flow shortages by going into debt with overdrafts or short-term business loans. However, too much of that sort of behaviour can send an organisation insolvent, into administration, bankrupt, or permanently out of business.
If you think insolvency can’t happen to your business, think again. For the June quarter of the financial year ending 2015, ASIC reported an increase of 18 per cent in Australian companies entering external administration, compared to same quarter the previous year.
During the financial year ending 2014, small- to medium-sized businesses (SMBs) dominated the corporate insolvency figures in Australia. ASIC received more than 10,000 insolvency reports from administrators during the year, with the vast majority (86 per cent) relating to companies with assets of $100,000 or less.
Clearly, SMBs are in the firing line when it comes to insolvencies and bankruptcies. This can be because they don’t have the deep financial buffer zones that larger companies with deeper pockets and longer lines of credit have. Most SMBs are comparatively lean and rely on stable cash flow to keep things running smoothly.
While there are a number of things that can cause cash flow problems for businesses, one of the most prevalent for SMBs is non-payment or late-payment by customers for goods and services. Other factors for businesses of other sizes might include market pressures, such as diminished demand, heightened supply, or a soft economic climate.
Although many of the factors that contribute to cash flow interruptions for SMBs may be out the organisation’s hands, there are steps companies can take to lessen the chances of some of the influencing factors, and others that can help mitigate the cash flow trouble itself.
There are five key tips to help businesses maintain healthy cash flow in 2016:
1 KEEP YOUR EYES OPEN
It might seem simple, but the first step for businesses to maintain healthy cash flow is to make sure they deal with businesses or individuals that have a good credit history, are trustworthy, and can pay invoices on time. If a customer’s credit rating changes for the worse, for example, businesses may want to reassess the terms of trade.
2 DON’T DALLY WITH LATE PAYMENT
Without prompt invoice payments, organisations can’t maintain their cash flow, which could send them into a financial tailspin. If a business keeps track of when issued invoices are due to be paid, it can follow up before non-payment becomes a problem. It is important to chase up payment without delay.
3 ISSUE INVOICES PROMPTLY
If a company takes a while to issue an invoice, its right to demand prompt payment will be diminished. While most invoices are generally issued promptly, sometimes this vital administrative task can slip down the list of priorities. It is important to not let this happen. Make sure the invoice is issued at the first possible opportunity with a clear pay-by date.
4 INCREASE CREDIT LINES
One way to keep cash flow going is to increase lines of credit with lenders or suppliers. This may not always be easy for an SMB. Yet if an organisation’s underlying finances make it safe to do so, this can be a quick and easy method to keep cash flow healthy, even if there is an interruption of cash inflow or outflow. However, if finances don’t support it, extending credit can expose a business to greater potential risks.
5 PROTECT YOURSELF
Businesses can also protect themselves from the variety of forces that interrupt cash flow with trade agreements, contracts, and trade credit insurance. Not only does trade credit insurance help keep cash going in the event of non-payment, it can provide an essential tool for organisations to trade confidently in the market, even if they have extended credit lines or are experiencing fluctuating market forces.
Trade credit insurance is an essential tool for businesses of all sizes to mitigate the fallout from a variety of situations that may leave a company with cash flow issues. These might include a customer itself becoming insolvent, or the delay of a supplier’s shipment.
Businesses trading on credit terms often have substantial amounts of working capital tied up in accounts receivable, which can be risky if customers don’t pay on time. Credit insurance protects cash flow by ensuring accounts receivable are covered no matter what.
This means that even smaller businesses that operate on lean budgets and profit margins can continue to do business with the assurance that they will be covered in the event their trading partners or customers don’t or can’t pay outstanding invoices. In such an event, trade credit insurance can often step in and provide the capital for the business to keep on operating without needing to opt for comparatively risky options such as extending credit or overdrawing accounts and eating into what might be a meagre buffer zone.
Mark Hoppe joined Atradius in Sydney in 2006 as the Head of Client Service, which saw him responsible for all the day to day client and broker issues. Mark was appointed as Managing Director for Atradius Australia and New Zealand in August 2014, with more than 17 years’ experience in the insurance industry under his belt.
For more information contact:
T: 02 9201 5222
E: info.au@atradius.com
W: www.atradius.com.au