How to help your clients avoid common cash flow mistakes – Part 1

In more than 30 years of working in the small business finance industry, I’ve seen the same mistakes come up time and time again. So many, in fact, that I’ve had to split them over two articles to cover all the issues.

Brokers can add considerable value to their client proposition if they can help their clients remedy and sidestep these mistakes in the first place. So, here is part one of common cash flow mistakes and how to help your clients avoid them.

1. Not having a business plan

Having a business plan in place sounds like a pretty fundamental step when setting up a small business, but you’d be surprised at how many operators attempt to fumble their way through without any formal forecasts and targets for their enterprise. As the saying goes, fail to plan and plan to fail.

Business plans don’t need to be complex. Free templates are readily available online. The Department of Industry, Innovation and Science has a good one. A business plan should include:

• a marketing plan
• a product plan
• risk management considerations
• competitor analysis
• staffing and HR requirements

2. Not having a monthly budget and cash flow forecast

Preparing a monthly budget and cash flow forecast helps small business operators make sure that cash is readily available when it is required and provides advanced warning of a likely shortfall. Knowing ahead of time that a cash shortfall is likely allows negotiation of an additional credit facility with a bank or non-bank lender from a position of greater strength than if it is a desperate last-minute situation.

A facility such as invoice finance or factoring can help smooth out uneven cash flow from issues such as late payment of invoices without the need to provide personal property as collateral.

3. Not understanding break-even pricing

A lack of understanding of break-even pricing is a serious problem for many small business owners. This ties in with failure to prepare monthly budgets and cash flow forecasts.

The break-even price for a business is the amount at which it would sell its good or service to cover the costs of production. Anything above the break-even price is profit.

Calculating the break-even prices of its goods and services allows a business to check that it is charging appropriate prices to its customers and, more importantly, making a sufficient margin on sales.

Many small business owners calculate the cost of supplies but do not accurately assess the cost of factors such as their own labour or marketing. It is worthwhile engaging an accountant to help determine an accurate figure for the break-even prices of a business.

4. Undercapitalisation

Many people fall into the trap of not having enough capital behind them when they launch a business. This places enormous pressure on the owners of the company to increase revenue at a time which is already incredibly stressful.

The growth of many small businesses is restricted by the level of funding not matching the value of the assets on the balance sheet. For example, a $50,000 overdraft doesn’t finance $300,000 of debtors and $400,000 of stock.

Steps that can be taken to ensure the business is not growing without capital or overtrading include consulting an accountant or broker, making sure that they are following your business plan, monitoring growth of the business and reviewing staffing levels and costs of premises.

Ensuring that all the company assets are funded is also a great measure. Having money in the bank to pay suppliers and finance assets is critical to avoiding insolvency-related issues.

So, how would a business know if it was undercapitalised? If the business has a payment arrangement with the ATO or trade creditors, or if it struggles to pay suppliers, wages and super, it is at great risk of being undercapitalised. Not being able to borrow from a bank is another clear issue for a small business. It might be time to talk to an accountant or broker about a finance solution for the business. A cash flow or invoice finance facility may be just what the business needs.

5. Poor accounting systems

Persisting with inappropriate or outdated accounting systems is a common problem in Australian small businesses. Some still operate manual systems on Excel while others are using superseded versions of MYOB or other accounting software packages.

Modern accounting software should be cloud-based, have tablet and smartphone functionality and be simple enough for non-accountants to use.

It is advisable to speak to an accountant for accounting system recommendations based on industry type and the complexity of the business.