Wayne Smith, the head of debtor finance at Scottish Pacific, reveals six tips to help small to medium businesses avoid a cash flow shortfall in the new year.
According to Mr Smith, many small- to medium-sized enterprises are concerned about how to pay their business activity statements at the end of February, following the long Christmas break.
While the lead-up to Christmas can be incredibly busy, many businesses find that operations afterwards go quiet for up to two months. However, while no invoices are being paid in the meantime, there are wages, suppliers and other bills that must be handled. Then, after a period of leaner cash flows, a BAS (business activity statements) payment is due.
Scottish Pacific highlighted that the ATO’s 2015/16 annual report showed that small businesses owed almost $13.9 billion in collectible tax debt.
As such, Mr Smith urged businesses to avoid running up a tax debt due to Christmas working capital issues, adding: “It’s not uncommon for high-growth businesses to end up with an ATO debt because they didn’t have the funding or cash flow support. Often this comes from a lack of awareness of the many small business funding options available, including debtor finance, that don’t require property as security.”
According to Scottish Pacific, these six steps can help SMEs boost their cash flow after the December break:
1. Speeding up the collections cycle. Scottish Pacific said that improving debtor days — the average time taken by customers to pay invoices — can make a marked difference to cash flow.
“A business turning over $110 million and with an average debtor days cycle of 60 days could receive a cash flow boost of more than $135,000 by cutting debtor days down to 55 days,” the lender said.
Ways to reduce debtor days include making sure that invoices show all the relevant information required by the customer to make payment; sending timely payment reminders; and putting in place a reminder call program.
2. Taking deposits on large orders. This can help avoid the need for SMEs to outlay for large production costs up front.
3. Closely monitoring stock. If there is too much stock on the floor, especially if certain lines aren’t selling, businesses can deplete their cash reserves. “If a line is a ‘turkey’, don’t hesitate to sell it off cheaply to turn it into cash,” suggested the debtor finance specialist.
4. Negotiating with suppliers. Work out longer payment terms to keep cash in the business.
5. Consider discounting for early payment. While Scottish Pacific warns that businesses may take a “small hit” with the discounting, the trade-off could be a reduction in borrowing costs.
6. Restructuring borrowings and looking at all working capital options. “[SMEs] can remove the reliance on real estate security by taking out facilities such as debtor and trade finance,” Mr Smith said. “With debtor finance, instead of the business owner taking on additional debt, the funder offers an advance on money that is already owed to the business.”