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Prepare For The Post-Christmas Cash Flow Drought

Supplier: Bibby Financial Services Australia
04 November, 2008

When much of the nation goes on holiday after Christmas, business activity shrinks and many small and mid-size enterprises face a two to three month cashflow drought that can bring the business unstuck.

This Christmas is likely to be worse than recent years, because the global financial crisis is squeezing credit and bank overdrafts and trade payments have been slowing, global specialist debtor finance provider, Bibby Financial Services predicts.

“Unless you are an ice cream seller at a beach or a removalist firm, which traditionally have their busiest trading over Christmas and into the new year, you need to start preparing now to cover costs and maintain strong cash flows when business is traditionally quiet,” Bibby’s Asia Pacific CEO, Greg Charlwood, says. “Without adequate planning now, the business may have to deal with serious issues next year, restricting its ability to benefit when trading does start to pick up after the drought”.

Small businesses should brace themselves for an economic slowdown in the wake of turmoil in international finance markets and a decrease in the value of the Australian dollar. They should be keeping a close watch on cash flow, considering the most appropriate finance options and improving administration processes, Mr Charlwood suggests. “The environment will become more challenging, so now is the time to prepare,” he says. “Companies that are growing rapidly are the ones at particular risk of cashflow strain. Importers in particular are also set to come under pressure as margins shrink as a result of the recent fall of the Australian dollar.

“In the rush to grow, it is often the fundamental business practices - such as getting sound credit control procedures in place - that are left at the bottom of the 'to do' list, yet growing companies are the most hungry for cash flow funding.”

One form of cashflow financing that is experiencing record demand in the current climate is debtor finance. It allows businesses to rapidly convert their unpaid invoices or receivables into cash and maintain appropriate levels of working capital. A fully outsourced debtor management service can also be added, if required.

Most debtor finance providers typically do not ask for real estate security, which adds to the appeal of this form of funding when property prices are softening and business owners are seeking to manage risks. Debtor finance facilities can either complement or replace current funding arrangements, to help businesses maintain growth rates while trading safely in a difficult business environment.

While credit is now tight, companies are also being squeezed by slower payment for deliveries. Many small businesses are waiting twice the usual 30 days for payment of invoices, with larger businesses among the slowest to pay. So in this environment, our 10 point checklist is designed to help small businesses get their houses in order, to provide maximum chance of surviving and thriving.

1. Get back to basics Bookkeeping does not make your paperwork more complicated - it makes it easier. If your office is full of heaps of paper and collapsing shelves, and computer files disorganised, then sort out your systems. You need a system to store your purchase and sales invoices, a petty cash system and a cashbook to summarise all the information. Importantly, keep your bank statements safe as they are a record of your payments and receipts.

2. Invoice on time It makes sense that if you do not invoice on time, your customers will not pay you on time. Keep a record of all ongoing projects so that it will be easy to raise an accurate invoice. Always ask your customer for a purchase order number and quote that on your invoice. Finally, raise the invoice immediately after the job has finished and be very clear about your payment terms.

3. Take control of your credit control Very few people enjoy getting tough on credit control but it is vital to the success of your business. Perform credit checks on new customers and set sensible credit limits. If your customers start delaying payment, call them just before payment is due. If they make a part payment, acknowledge receipt of this but ask for the balance. If your customer queries one item on an invoice, insist on full payment of the rest of the order. Finally, if in doubt, stop all credit until payment is received. Obviously, key relationships will need to be maintained and the approach will vary from client to client.

4. Always check the credit status of a new customer Risks must not be underestimated in the enthusiasm of taking on new business. Credit checks can be done quickly and are relatively inexpensive. It is important to establish the correct business title, together with its legal status (i.e. limited company, sole trader etc.) before seeking reports from agencies or trade references.

5. Chase overdue accounts regularly and take prompt action Follow up overdue accounts by telephone. Check customers have received invoices and that there are no queries. Deal with the same person each time you contact the company and make the largest outstanding debts your priority. Send out statements monthly. Do not wait until the end of the month before invoicing if you can send out invoices at the same time you send out goods or deliver a service.

6. Look at more flexible funding options such as Debtor Finance Is your business funded in a way that will carry you through temporary difficulties whilst simultaneously allowing you to take advantage of growth opportunities? If you are stuck with a bank overdraft that is repayable on demand, look at more, flexible methods of funding. The debtor finance, or factoring, that Bibby Financial Services provides frees up your cash by giving you access to up to 80 per cent of the value of an invoice as soon as you raise it, with the balance, less a small fee, returned to you when the customer pays the invoice, giving you better control over cash flow whilst allowing you to keep customer payment terms the same. In addition asset finance packages can allow you to pay for essential equipment over time, so that your cash is kept liquid.

7. Review your suppliers The next step in your annual overhaul should be to review the prices all your suppliers are charging you. Think what effect a five or ten per cent reduction in costs could have on your profits. Many companies get familiar with suppliers and forget to push them for bulk, early settlement or loyalty discounts. Take a look at what new suppliers would charge you - you will soon know if you are paying a fair price.

8. Dust off your business plan When you launched your company, chances are that you worked hard to produce a winning business plan. Have you ever looked at it since? Review it now! If things have changed since you made your plan, ask yourself why. What have you learnt? Crucially, were your financial forecasts accurate and are you still budgeting effectively?

9. Call an accountant or business advisor If you are already trading and have not got an accountant, take action now. Accountants not only help you get your systems in order; some will also give business advice. Plus, they provide a range of tax services, from completing tax returns to sorting out GST, PAYE and BAS contributions. If you are worried about fee levels, make sure you get quotes before appointing your chosen firm or individual.

10. Sort out your tax return - before the deadline! With an accountant on board and a tidy, well-organised office, completing your tax return should look a lot less daunting. Rather than waiting until the deadline looms, resolve to complete your return as soon as you can. To complete your return, your accountant will need full records of your financial transactions from the year just ended.

Running a small business is a constant juggling act. Many are severely under-staffed, which means that the business basics can be overlooked. When you consider that one third of new of companies fail in the first three years you start to appreciate how time invested in getting the basics right is time well spent, Bibby Financial believes.