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Update: The Australian and New Zealand operations of Bibby Financial Services were acquired by Scottish Pacific Business Finance in late 2015 to create Australia’s largest non-bank invoice finance specialist. Welcome to our website.

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Staying on top of Cashflow Issues

Staying on top of Cashflow Issues

It is not uncommon for Scottish Pacific to have an influx of enquiries from SMEs in the post Christmas period. It is a time of the year when the cash in any business can be tight. There may have been a 2 week shutdown over the festive period during which invoices would not have been raised, which, in turn, means that customer payments in February will be low. Stock levels may have been run down in the lead up to Christmas and Staff leave entitlements may have been paid on the cusp of the Christmas break.

This presents an ideal opportunity for business advisers to engage their clients in conversation around their cash position and working capital requirements.

So what are the key questions?

What are the average debtor days? How does the figure compare to the terms stated on the invoices? How do the terms agreed with customers compare to competitors? What is the prospect of shortening the debtor days? For a business turning over $10M per annum a 5 day reduction in debtor days is equivalent to a cash influx of $100, 000.

Is the business paying suppliers on time? Are the terms in line with the “industry norm”? Is there an opportunity to negotiate extended terms? The longer the payment terms, the longer the cash stays in the bank.

What is the stock position? Are stock holdings at the optimum level? Is the business holding obsolete stock or date sensitive stock that is nearing the end of its term?

Does the business have the most appropriate combination of finance facilities? When did the directors last review its funding arrangements? How is stock funded? (creditor days/overdraft/trade finance)? How are debtors funded? (overdraft/debtor finance)? Stock and debtors are the two key current assets that often tie up cash in businesses.

And what advice might be given?

Shortening debtor days often starts with the basics. Make sure that invoices contain all the required information - clearly stated payment terms, cross-referenced purchase orders and readily accessible proof of delivery documentation in the event of query or dispute. Don’t assume payment will be made on the due date - issue regular reminders and make follow up calls.

Understand which stock lines are fast moving/slow moving and ensure holdings are related to speed of movement. Don’t hold on to stock that is date sensitive or in danger of becoming obsolete - turn it into cash at a discount (be prepared to take the hit to profit margin to turn it into cash).

Don’t pay suppliers and other creditors before the due date, but equally don’t push payments out too far without agreement. Make sure the business isn’t tied to terms that are shorter than the industry norm - be careful paying early for discounts as this helps profitability but not cash flow.

Explore the possibility temporary increase in the bank overdraft to massage the seasonal impact or consider alternative working capital facilities that are more responsive to the trading cycle, such as debtor finance or a trade finance facility. Debtor finance will generate immediate cash from the receivables and trade finance will help retain cash n the business, having the same impact as delaying payments to suppliers.

Relationships with lenders are crucial - keep up to date with reporting, operate on a “no- surprises” basis. Any withdrawal of facilities is likely to have the most significant impact on cash flow. Regularly review options and be aware of what is available in the marketplace. Make sure there is headroom for growth and don’t wait until facilities are fully utilised.

There may be trouble ahead...

If debtor days extend outside industry norms, find out why: are customers struggling to pay, or just won’t pay? Is there an issue with collections activity (for example, with statements, reminders and follow up calls)?

If stock holdings are increasing out of sync with sales, is there a build up of slow moving stock items or out of date stock? Is too much stock being held? Is it possible to reduce stock holdings? Can the business move towards JIT (Just in time)?

If Creditor days lengthening without suppliers/creditors agreement, this could be evidence of cash pressure building, as could ATO obligations not being met on due dates.

If there is pressure on funders' facility limits, lending covenants are being breached or funders are looking to reduce facility limits.

Summary Hints and Tips

  • Maintain debtor days as close to stated terms as possible
  • Take the full credit period available before paying supplier and other creditors. Negotiate extended terms rather than just paying late.
  • Identify and maintain the optimum stock levels
  • Make sure the funding arrangements in place are the most appropriate for the business’ requirements.
  • Stay close to your funders and avoid nasty surprises!
Debtor Finance - The Best Option?
Business Finance - Are you seeing the full picture...

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