Getting a handle on your cash flow

By Barry Thatcher, National Manager NAB Franchise Banking

This article appeared in Issue 3#2 (January/February 2009) of Business Franchise Australia & New Zealand

In the current economic climate the old saying, ‘cash is like oxygen’ has never rung so true. And forecasts show that cash flow management will be the ultimate key to success for businesses large and small, well into the future.

Whether your business is a franchise or an independent business, you need to be aware that the tightening market conditions mean that a business without proper financial structure, planning and support is at a greater risk of failure.  

A healthy cash flow ensures a business is never caught out-of-pocket, and is well equipped to cover unexpected costs, and to ride the peaks and troughs of these turbulent economic times.

In the current economic climate, cash flow management is like walking a tight rope.

To be successful, a business needs to balance the cash flowing in and the cash flowing out. It’s about knowing where your money is, staying on top of your finances and having the right systems and products in place. It is important that your business is always growing - and the secret to growth in a downturn is good cash management.

Not surprisingly, cash flow concerns are a major source of stress for business owners and managers in Australia; according to a Galaxy Research study of businesses with a turnover of up to $20 million a year¹. 

The survey, commissioned by NAB, found a staggering 93% of owners and managers admitting they worry or become stressed about cash flow.

The research also showed business owners and managers were most stressed about being hit with unexpected bills or expenses (82%), while chasing payment from late or non-paying customers was another source of great concern (71%).

But cash flow problems are not just causing stress. They also affect the long term profitability of business, with one in three businesses reporting cash flow problems have put a strain on the relationship with their customers or suppliers, and about one in six losing clients because of cash flow problems.

Despite the serious consequences of cash flow problems, only one in five business owners or managers have help managing their cash flow.

And an even more worrying statistic is that only 27% of business owners turn to their business banker for help on cash flow management. 

Your business banker is there to help you with advice and cash management products and solutions. So make sure you are speaking with them often and asking for help.

Know where you stand from the start

For people considering a franchise business, it is critical to begin by considering not only the cost of acquisition or setup, but also what working capital will be needed to fund the businesses until the business breaks even. 

It can take a franchise business up to 18 months before it starts to turn a profit, depending on the nature of the business, so it is important for a franchisee to take this and the outgoing business costs into account.

Potential franchisees should also consider the return on their investment ROI (EBIT/Total cost of investment) and what return they need to justify their outlay. As a guide, we suggest a minimum return of 25% for franchisees when considering if the investment will provide an adequate return or not. However this will vary depending on the industry, size and value of the franchise business being considered and we always recommend people seek professional advice before making a final decision.

The majority of businesses will experience seasonal cash flow swings which business owners need to factor into their budgets and accounting. A good example of this is a franchise business that is heavily reliant on gift or holiday periods such as Christmas, Mother’s Day or Father’s Day.

In some businesses, those periods may account for as much as 70% of annual business and profits. If that’s the case for your business, it’s critical that outside these peak periods you budget tightly, control costs and use profits generated during the peak periods to carry the business through. 

One thing many franchise businesses don’t consider is that the very growth they seek can have a negative impact on cash flow.

Every business owner will seek to increase sales, but the reality is growth that is not managed carefully can also cause businesses to fail. 

The growth of a business often requires more staff, more stock and more resources to meet the growing sales demand. 

If businesses underestimate these demands, they can find themselves in a cash squeeze between having to pay suppliers and receiving payments from their own customers. 

There are a range of actions small businesses can take to reduce the impact of cash flow problems; however the Galaxy survey revealed few businesses undertake these on a consistent basis.

Businesses should be constantly looking at improving ways of collecting revenue. Keeping track of your income is essential to ensure your business remains profitable.

Remember to also keep on top of your invoicing as it is particularly important to ensure all transactions are made and accounted for regularly. Not only will this help you to keep up-to-date with any money owing, but will also keep your cash balance and accounts in good shape.

Tools at your disposal

It is also a good idea to investigate any financial tools and products in the market that are available to help you manage your cash flow.

Whether you interact with customers physically or virtually, there are many solutions from business banking partners like NAB that enable you to receive payments from a variety of channels – whether that’s via ETFPOS, your website or over the phone.

Once you have the products and support you need from your bank, the next step is to develop your cash flow forecast. 

This will help you track your finances within the cash cycle - from paying for goods, services and suppliers to collecting revenue from customers.

Given the uncertain times ahead, there may come a time when you will need to think about alternative funding solutions to keep your business afloat.

During the past decade, businesses have enjoyed a strong economy and many have become accustomed to factoring as much as 10% growth year on year.

But current economic indicators suggest businesses are entering a more volatile period, so operators need to understand their core customer base and how sales patterns might be affected if the economy tightens.

To help fund any cash flow shortfalls, short term financing options are available to assist with growth needs as well as those unexpected operating expenses. 

Cash flow based finance options, such as invoice-financing, are particularly favourable as they have the ability to grow with the business.  Access to these funds is based on the strength of your business sales, so you are always borrowing within your means.

We’ve seen strong demand for working capital finance from our business customers that are increasingly after smarter funding solutions, which suit their cash and revenue cycles.

The traditional overdraft is also a handy lending product for short term financing, providing a credit limit on top of a cheque book account and including features such as the use of variable interest rates, cheque book and electronic access. But if you decide to access such short term funding, it is also important to remember to consider any associated costs.

Franchisees often find themselves in difficult situations when it comes to confronting late-paying customers. They are often reliant on a small customer base, and form tight relationships with valued clients. So when it comes to conversations about money, there is some trepidation and anxiety when it comes to raising the issue. Taking measures to better manage your cash flow and becoming familiar with the banking solutions available, will prevent many business owners finding themselves in this situation.

Managing the cash flowing out

In an environment where you need to spend money to make money, it has never been more important to know the most cost-effective way to make outgoing payments. 

Methods such as direct debit can often be an efficient payment solution for meeting supplier and staff costs. 

You could also consider controlling and monitoring your expenses by issuing business debit/credit cards to staff as a useful way to cover unexpected or impromptu payments. Try making the most of debit rather than credit and determine within your business the most appropriate times for their use. 

Make sure that you keep a record of any repayments that your business may have on lending products and the amount owing. 

But most importantly, remember to always hold and spend your cash wisely. Prioritise and budget your expenses to determine which costs are payable within your means to reduce any unnecessary pressure on your cash flow.

Every business has unique challenges and although it might sound obvious, great business leaders never overlook the basics. Ensuring your cash flow is the cornerstone of all businesses large and small.

For more information visit

NAB LogoImportant note

NAB has not taken into account your objectives, financial situation or needs and recommends that you consider whether any advice in this article is appropriate for your circumstances.

¹  SME Cash Flow Study, Galaxy Research, September 2008

  • Put together a good cash flow forecast - A cash flow forecast is a key diagnostic tool for the health of a business. Without one, getting your business’s cash flow right is almost impossible.
  • Communicate from day one - Constant communication as the crucial first step to improving debtor days & the best ways of getting a bill paid on time.
  • Check the credentials of new customers - Implement standard credit checks for new clients that will be offered credit.
  • Give your customers a reason to pay - Consider a range of different ways an early payment discount can work.
  • Spend more time ensuring your big clients pay - Managing big clients requires a careful approach, with plenty of care and attention backed by a firm commitment to being paid.
  • Be disciplined - If sweet-talking, phone calls, or discounts don’t get your debtors to start paying, they need to know that you won’t be afraid to resort to other actions.
  • Don’t grow yourself out of business - Talking to your bank can help you get through the cash flow squeeze that often precedes a profit boost.