Controlling the cashflow cycle

How would you prefer your cashflow – an intermittent trickle or a steady stream? NZBusiness consulted the experts to help business owners improve their cash position.
Working capital constraints – or to put it less elegantly – cashflow problems, are a serious issue for many New Zealand businesses. And, while there are a range of solutions available, finding the best option can take time.
“Most business owners and managers have lots of issues to deal with, so prioritising what needs to be done to improve the cash position, in the short and long term, is problematic,” says Amanda Watt, principal, WHK Auckland Advisory Team.
The main determinant has to be understanding the cashflow cycle as well as the supplier and debtor terms, says Craig Brown, who is a senior lending manager at Lock Finance.
“Exactly what are a business’s requirements and who can meet that need with the most appropriate facilities.” He says it’s also important to be comfortable with the reputation of the financer and their experience and longevity in the industry.
Watt’s advice is to get advice. “The cost of not doing so could be much more in the long term. Fortunately NZ Trade and Enterprise recognises that SMEs need help in this area and may contribute to services that help develop a plan to improve cashflow and profit.” She cites WHK’s Profit and Cashflow Optimisation service as one that’s helping smaller enterprises find out where they need to focus to improve the business.
Brown says businesses have two options when immediate sources of finance, such as shareholders or the company’s bank, are no longer prepared to provide cash.“They can try to improve the cashflow cycle by adjusting where possible – getting debtors to pay earlier and stretching out creditors – or they can leverage the assets of the business to a higher level than they may currently be at, releasing additional cash tied up in those assets. These can be either fixed or current assets.”
Lock Finance specialises in leveraging against current assets, namely debtors, offering lending products that assist with working capital. “Most of these focus on the debtors to increase funding, but some can also support the importation of stock.” It depends on exactly where in the cashflow cycle the business requires the money, says Brown.
“For example, a business may receive indent orders from their client then have to pay overseas suppliers up-front before they receive the goods and can invoice them out. This is more of a trade finance facility. Another business may receive open account terms from their supplier but offer extended terms to their clients. This is more of a debtor finance or factoring facility, or a mix of both.”
Factoring solutions
Factoring – selling a business’s unpaid invoices for cash – is a viable alternative to an overdraft or debt finance, says John Blackmore, national sales manager at Bibby Financial Services. “Cash, usually between 75 percent and 90 percent, is freed up almost immediately, with the balance paid once the invoice is received, less a fee for the service and an interest charge for invoices outstanding. Funding limits grow in line with turnover.”
In addition, the sales ledger and collection of accounts is usually managed by the factoring company – unlike invoice discounting, a funding-only option also available from Bibby Financial Services.  
“Many fast-growing businesses utilise debtor finance to fast-track their growth and better manage cash flow,” says Blackmore. “Particularly in the first couple of years of trading.”
Because it’s a self-liquidating facility, factoring is the smart choice for businesses looking to increase cashflow, says Wayne Goss, Scottish Pacific business development manager. “The company isn’t taking on additional debt per se, but rather, receiving an advance on money that’s already owed to them. And, unlike overdrafts, it does not generally require real estate security.”
And forget those comments about factors letting debts drag on in order to pay less back to the client. “The factor and the client company are fully aligned in wanting to bring in the debtors as fast as possible,” says Blackmore. “The borrower is motivated by reducing the interest cost and the factor by the desire to recover its security so that it can effectively continue funding its client.”
But he warns factoring may not be the best solution for companies with very low profit margins. “Firstly their profitability may be impacted once the factoring fee is considered, and secondly, since factors lend around 80 percent of the value of the debtors to the business up-front, this may be insufficient funding to solve any cashflow challenges.”
Significant levels of doubtful debts can also be a problem, he says. “Although the factor will lend against a debt, once it becomes a bad debt the business is over-funded and an adjustment needs to be made, thus reducing cashflow down the track.”
“Factoring can really only be used where a business sells B2B on credit terms,” says Goss. “It’s not an option for retail stores or any company with a high concentration of monies owed from one business.”
Scottish Pacific also provides invoice discounting – a service Goss says is frequently confused with factoring.
Invoice discounting is an option which Michael Bushell, managing director at Pacific Invoice Finance says has been slow to catch on in New Zealand. However, the number of companies in Australia and New Zealand using this flexible service has grown by 30 percent each year for the past five years, he says. It differs from factoring in that while the ownership of a company’s invoices is assigned to the lender, the business owner is still responsible for collecting the receivables. “The fact that invoice finance is undisclosed, with clients managing their own debtor collection, is seen as an advantage by many companies,” says Bushell.
Pacific Invoice Finance is one of only three specialist invoice finance companies in New Zealand, although, as indicated, the product is also offered by some factors. “It’s a change in the way a business can be funded,” says Bushell. “We assess the ability of a client’s debtors to pay, that’s our risk, whereas a bank looks at their client’s ability to pay on a historical basis.”
And they’re not working only with established businesses. Bushell says they’ve also funded a number of successful start-ups. “We had a customer who had sourced a new product overseas and established a demand here so we sent them out to get firm orders then assisted them with the importation of the product. In two years they’re turning over in excess of a million dollars a year from nothing.” Because their clients include a number of exporting companies Pacific Invoice Finance also works in multiple currencies.

Invoice sooner, not later
‘Hitting ‘em while they’re hot’ is another cashflow strategy worth pursuing. Taking advantage of the excitement factor and getting those invoices out immediately can increase the flow of cash, says Peter Wilson, principal at chartered accountants, Oktillion.
“A lot of smaller businesses will do the work then wait until the end of the month to bill – then wait another 20 days before the invoice gets paid. By that time the value of the service has diminished in the customer’s mind.”
The sooner you invoice a customer, the sooner you’re likely to get paid, says WHK’s Watt, who notes many small businesses have a seven-day policy which is great for cashflow. Accounting systems such as Xero, which allow invoicing to be done anywhere there is an Internet connection, can speed the process and are particularly relevant for trades-people who can prepare and email an invoice immediately after finishing the job, she says. “The customer will receive it within minutes of the job being completed.”
Oktillion’s Wilson says businesses also need to be more open to the different payment options available today. “Fewer people are writing cheques so consider mobile EFTPOS, bank cards, direct credit – I now offer six options for payment to open all the doors towards cashflow.” And think twice before offering discounts for prompt payment, he says. “It’s fine for utility companies but if you charge at an hourly rate and start discounting for people who pay on time, you’re really discounting the value of your services. Professionally that’s probably not the best thing.”

With factoring, SME owners who may already have more than enough on their hands with the day-to-day management of the business, can outsource chasing creditors to the factoring company – thereby saving both the time and the stress of accounts receivables.
“It’s a great option as the business owner or manager knows that within 24 hours of raising an invoice, up to 80 percent of the funds for that invoice will be available,” says Goss.
Indeed, outsourcing accounts receivable management can assist smaller enterprises get paid faster.”
The decision invariably comes down to cost versus benefit,” says WHK’s Amanda Watt. “If you’re spending valuable time chasing debtors, and you could be using the time to increase sales, for example, it’s definitely worth outsourcing. What all small business owners should consider when they’re performing administrative tasks is, ‘what could I be doing instead of this?’ If they outsource the particular function to someone for $25 an hour, this might allow them to negotiate sales earning $150 an hour.”
There are a number of independent debtor collection agencies that will work part-time and charge accordingly, she says. “Ask around and get a good recommendation. The difference between someone good and someone below par will make a difference in how quickly you get paid.”
With cashflow under control you’ve got control of the business; stock, credit and debt will all be managed with greater ease, and the ability to forecast will be improved. Why risk losing the lot when a solution is as close as the phone?

Patricia Moore is an Auckland-based freelance writer.

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