When it comes to the art of managing cashflow, many business owners can be their own worst enemy, with poor systems, wrong attitudes and too much focus on making the next sale. NZBusiness rides the highs and lows of cashflow management.
Management guru Robert Heller once said, ‘Like good health, a positive cashflow is something you’re most aware of when you haven’t got it. That is one of the most profound truths in life.”
He was right, of course, and as any business owner will tell you, when your cashflow situation is anything but positive, it will certainly keep you awake at night.
Unfortunately, as AccountabilityNet CEO Michael McCook points out, poor planning, wrong mindsets and a preoccupation with making the next sale often get in the way of actioning a solution to that tricky cashflow situation. He says many business owners will only do a cashflow forecast in their head. “This simply doesn’t work – all it does is remove clarity and create stress.
“Business owners also confuse profit with cashflow. Profit is not cash – it simply proves that you have an excess of income over expenses and may simply be reflected in an increase in stock on hand or accounts receivable,” he says. “Profit means nothing until it is converted into cash and that should be your focus.”
Then there’s the biggee – business owners fail (or are slow) to chase their debtors because they’re more comfortable lining up the next big sale. You’ve got to be the ‘squeaky wheel’ every single month if you want payment, says McCook. “Even if it means calling around to their home. It’s the one who shouts loudest who gets paid first.”
If you don’t chase slow payers, you risk ending up in the ridiculous situation of using your overdraft to fund your own customers to buy your own goods and services!
If your cashflow is dependent on business from just a few major clients then you’re doubly vulnerable. Don’t be a one-dimensional business, advises McCook. “Having a diversity of clients, and of all sizes, makes sense; that’s your insurance policy.”
How often do you prepare a cashflow forecast for your business? Any accountant will tell you that this exercise is paramount for predicting when and where any cashflow issues will arise. McCook likes to call it spotting the potholes before you hit them – or being proactive rather than reactive. A regular forecast down on paper, not in your head, will definitely let you sleep better at night. In fact, by now you should have prepared a cashflow forecast for the Christmas trading period, he suggests. “Do you need another $20,000 to cover wages over that period? Plan for it now. The banks like it because it proves you’re organised.”
A forecast doesn’t have to too detailed either, says McCook, just functional – “a simple spreadsheet could be all that’s required”.
Forecasting works; McCook knows a client who traditionally always incurred IRD penalties. “By getting them to build a forecast they could set aside GST throughout the two-month cycle and actually knew what the debt would be well in advance. All of a sudden the light came on; they could see the ramifications of doing something now and the impact it would have some six months down the track.”
Drawing on his many years of experience in accounting, McCook advises all business owners to make sure they write off all doubtful or bad debts come the 31st of March. “If you don’t then you’ll be paying tax twice,” he says, “terminal tax and provisional tax the following year. If you don’t write off those debtors – you risk 50 to 60 percent of the amount [owing] being paid in tax.
“Of course, just because you write off those debts doesn’t mean you then stop chasing them – it simply removes the debt from the books.”
Don’t be afraid to tell the bank
Total transparency with your bank is vital when sorting out cashflow issues. Don’t be afraid to front up to them.
Mark Stephen, GM business markets, at Kiwibank says your banker will have a really good understanding of what your cashflow should look like compared to other similar businesses within your industry. “They are trained to critically assess your business end-to-end to find the reasons why you may have cashflow concerns. At the end of the day the bank has a real interest in seeing your business succeed,” he says. “How would we ease your mind? We would establish the facts and help you work through these in a logical manner. To solve your cashflow problems we need to figure out what’s causing the problem and work on the solution.
“Once you know what to fix the problem becomes surmountable.”
So when you fess up to your bank – what kind of questions can you expect? Stephen says they would start by gaining a firm understanding of your overall situation. “We’d look at the sources and uses of cash – is the business generating enough and is it spending more cash than it generates?
“After that we would dig into where the cash comes from and goes to. Work with you to get inside the number of days outstanding for your debtors, understand your billing cycle and your debtor collection policies (terms of trade). Then look into your cash outflows to see your creditor terms. Who are your suppliers? How do you pay them? When do you pay them and what terms do you have?
“And we could look at your debt structure – is your overdraft appropriate and have you funded your assets properly with the right structure? That is, have you used your available cash in your business? We may need to help you structure your finance in a different way to free up cash.”
Cashflow management is not getting any easier for the majority of businesses – particularly since the GFC arrived on the scene. The tighter the business competition, the harder it gets.
McCook offers the following tips to help business owners get to grips with their cashflow.
“First, if you are the business owner, don’t do debt collection – a professional debt collection agency will chase the money much more efficiently than you ever will. And if everything turns pear-shaped, you always have an intermediary to place the blame on. If there is an issue, the customer will usually talk more readily to a third party anyway.”
Secondly, prioritise your customers – if one is a better payer, provide them with better service.
“If you have a bad payer, and they’re a significant spender, get payment up front. Don’t be afraid to ask for it and get people on automatic payment wherever possible.”
McCook believes large corporates have a responsibility to pay smaller businesses on time – he also advises business owners to regularly review their pricing structure. Are you making enough money off each job? Many business owners are scared to put their prices up. McCook knows of a cleaning firm that he convinced to do a cost/income analysis – only to find that on around 30 percent of their jobs they were actually losing money.
How much is a client worth to you? You should be making a profit on all jobs. Putting up your prices might lose you some customers, but if they’re loss-making ones, you’re better off without them.
McCook’s final tip? A no-brainer – always ask your accountant for advice. “They’ve made or seen more mistakes than you ever will, and they know what to do.
“Remember, if Italian is the language of love, accounting is the language of business. It’s just that many business owners fail to learn the lingo.
“To play the game of business, use accounting to convert your business performance to a readable score. If you can read and understand the scorecard, then you can play the game well.
“One of the key reasons new businesses fail is because they fail to understand the scorecard.”
The customer is key
Of course, the old adage often repeated in this publication, that 100 percent of your profits comes from your customers, is worth repeating in the context of cashflow management. Harry Ferreira, head of small business retail banking at BNZ, advises business owners to concentrate on winning and keeping customers. “Continually improve your understanding of your customers and the competitive environment to refine your marketing plans and take advantage of new opportunities. Ultimately, your risk is minimal if you have a mix of both loyal and new customers.”
Building customer loyalty to lock in revenue and reduce the risk of losing a key account will also have a direct impact on cashflow. “An example is the adventure tourism business that worked closely with a hotel and had a ‘loyalty budget’ to ensure that the hotel staff would continue to refer tourists to them. They would invite the hotel staff to events, and offer free trips to staff and friends.”
Ferreira says try to avoid disputes and litigation by using contracts and clear agreements, and following correct procedures. Negotiate solutions to disputes if you can.
“Monitor your cashflow closely too. Cashflow is the balance of all money flowing in and out of your business, with the main inflow usually coming from sales. Use a cashflow forecast to manage your business. The more warning you get of cashflow peaks and troughs, the more time you have to deal with them. Planning ahead will make it easier to arrange for additional finance when the need arises.”
Smoothing the peaks and troughs
For most owner managers keeping up a consistency of cashflow is the major challenge when growing a business, and this is when other ‘working capital’ resources such as debt factoring and invoice financing (also known as debtor finance and receivables finance) can come into play. The principle behind factoring finance solutions is to unlock the money that is tied up in a business’s debtors list.
“The faster any business can collect its sales proceeds the faster the business can reinvest,” explains John Blackmore, national sales manager for Bibby Financial Services. “For a growing business especially, this can mean the business can grow at a faster rate than generally they could through a conventional fixed overdraft facility – which would most likely be supported by personal assets or property for SME owners.
Typically a business may have to wait on average 45 days to collect sales proceeds. With invoice finance you can access up to 80 percent of the GST inclusive invoice value immediately. “Some may say it’s too expensive, but successful business owners and advisors see the cost as an opportunity cost. If we borrow these funds can we make more sales while the market opportunity is there? Businesses who choose not to explore alternative finance solutions may miss the opportunity,” says Blackmore.
Lock Finance is a working capital specialist that has also helped many companies solve their cashflow challenges, but there are a few things to check out before such an arrangement is undertaken. Once a business has looked at their cashflow management processes, sorted out their terms of trade and dealt to any internal management issues, if there is still a cashflow funding requirement then Craig Brown, general manager lending at Lock Finance suggests it’s time to find the right finance offering.
“In my opinion this should include a mix of factors in which the directors can decide the best option for them. Most businesses would approach their bankers. That is fine and is probably the cheapest [option] if leveraging against the shareholder personal assets. However, some of the other factors to consider are assets protection (do you need to expose your property especially if it’s in a trust?) and flexibility (can the facility increase if your sales increase?). “But if a bank is reluctant to help, where do you then look? Working capital finance companies like Lock Finance can offer a solution against the receivables that does not require any property to secure the borrowings, and is flexible enough that you don’t have to have a perfect balance sheet or profit and loss.”
Of course, two common concerns for business owners when looking at factoring solutions are the cost, and the requirement for confidentiality. Brown can set you mind at ease on both counts.
“The costs we charge are an interest rate, charged just like a bank overdraft, and it can be under 11 percent – as cheap as some bank rates. An administration fee is also applied which is dependent upon the level of activity the business does.”
Brown also reminds us of the need to understand the opportunity cost of not being able to finance the growth that they could be achieving with the additional cashflow facility. “Also potential supplier discounts and internal staff savings if the debtor administration is outsourced to us need to be taken into account.”
And if you don’t want your debtors to know that you’re financing your invoices? No problem, Lock Finance, and in fact most factoring companies, are able to provide debtor finance facilities where the debtors don’t know any financier is involved.
Where a facility needs to be disclosed, however, certain procedures are adhered to in order to make it all as seamless as possible. For example, John Blackmore at Bibby Financial Services says the first clients/debtors hear of the finance arrangements is through written correspondence.
“Bibby gets a letter prepared on the borrowers letterhead, signed by the director, stating that they have engaged us to assist with the debtor management so that the owners can concentrate on servicing their clients better and concentrate on growing the business. So long as the business owners see the borrowing as beneficial for their business they should not hesitate to confidently tell their clients of this arrangement.”
Craig Brown’s best advice on managing cashflow is to “make sure you truly understand your existing cashflow”.
“If you don’t, there’s no need to feel embarrassed; seek the right advice. Make sure you understand the impact your decisions will have on your cashflow – for example, if you choose to give clients extended terms. What is the impact of having a proper invoicing /collection process? Will offering a discount actually get more money in? Perhaps it is cheaper to actually finance that period?”
While debtor finance can undoubtedly help smooth out cashflow fluctuations, businesses should also regard it as a means to assist with business growth, says Wayne Goss, who is the head of business development at Scottish Pacific Debtor Finance. “Our facility provides a flexible line of credit directly linked to sales volumes that increase in line with turnover, without the requirement for real estate security,” he says.
Debtor finance facilities can also be used to help fund acquisitions and management buyouts utilising the accounts receivable asset, adds Goss. “Or used to generate additional cashflow to support businesses through turnaround or restructure scenarios.”
Scottish Pacific has also recently introduced its Trade Finance for Importers solution under the banner of Scottish Pacific Tradeline banner. This facility provides working capital for importers at the point of shipment.
Of course, before committing to funding a cashflow solution it pays to talk things over with your accountant – some of the costs can be value destroying on your sales unless you have those costs built into your gross margins. You may find your accountant/advisor has a different perspective on things. Certainly Michael McCook believes caution should be exercised – particularly if you’re entering into a long-term arrangement. Invariably he sees the ultimate cause of cashflow problems as the business owner. “Business owners need to be smarter on how and what they borrow money for – and understand the difference between good debt and bad debt. Good debt can be written off against tax, or somebody else can pay it. Bad debt on the other hand is paid with post-tax earnings.”
Invoice financiers, naturally, are careful who they’ll take on anyway. “It’s always advisable to not finance receivables when SME owners are experiencing a decline in business sales and/or financial performance,” says Bibby’s John Blackmore. “Troubled or stressed businesses need to identify ways to turn the performance of the business – then an invoice financier may be able to assist.
“But just like any financier, they will need convincing,” he says.
Glenn Baker is editor of NZBusiness.
• Ensure your business has clear, documented terms of trade in place.
• Ensure all the required details are supplied on each invoice (purchase order numbers, etc).
• Introduce professional collection systems and procedures to ensure that overdue debt is chased promptly.
• Manage stock levels – don’t hold too much slow-moving stock.
• Take the credit available from suppliers, but pay to terms.
• Consider asking for deposits to support large/significant orders.
Source: Wayne Goss, Scottish Pacific Debtor Finance.
Making it easier to get paid
Kiwibank, like all banks, has a range of tools to make it easier for businesses to get paid. Its Fetch product range is designed to assist businesses to get paid faster and save time and money; so they can improve cashflow and liquidity, reduce funding costs and reduce bad debts by identifying counterparty risks earlier – to name just a few. The Fetch suite includes Fetch Mobile payments, which allows businesses to collect payments on the go from a smartphone; Fetch Invoice payments, which allows businesses to get paid online by generating a URL that can be sent to their customers; as well as Fetch Web payments and Fetch Recurring payments.
More cashflow quickies
- Know where your cash comes from and goes, to the last cent.
- With your own suppliers, make sure the terms of when you pay match when you get paid.
- Understand the seasonal flows in your business and have your bank structure working capital facilities to match peaks and troughs.
- Keep your books up to date and have regular cashflow reporting; no point waiting until 31 March next year to discover you have a problem.
- Keep your bank up to date, if you see a problem come and talk.
- Structure your finances well. Using cash to buy assets can use up cash that is needed to run your business and pay the bills.
- Keep aware of what’s happening in your local market. Are other businesses experiencing slow payers too? Join your local Chamber of Commerce, network and understand local cashflows.
- Capitalise your business properly on day one so you have enough cash available to meet outgoings.
- Source: Mark Stephen, GM business markets, Kiwibank.
Shifting the tax goal posts
The Christmas holidays provide a much-needed break for many Kiwis, but they can be a cashflow nightmare for businesses that still have to pay a third of their tax bill on 15 January. Many shut down for several weeks so they’re not earning much, yet they still have to part with staff holiday pay. Others have bought stock for sale but have not yet been paid themselves. If tax isn’t paid on time, the IRD charges high interest costs and late payment penalties.
Pay My Tax, a new service from Tax Management NZ (TMNZ) helps overcome this common scenario. Using the Pay My Tax app powered by www.paymytax.co.nz, business owners can use their mobile device from wherever they happen to be, to link to the website and delay their provisional tax payment to a date that better suits their cashflow.
Feedback from clients has been overwhelmingly positive.
Graham Colebrook of West Auckland-based carrier firm Reliance Transport says the service is quick and easy to use and “a great way to aid cashflow”.
Jo Pitkethley from timber decking specialist Keyland Properties in Rotorua describes the service as “efficient, fast and pro-active. Brilliantly simple.”
Accountant Michelle Tubb at Simple Strategies in Kaiapoi says Pay My Tax is a valuable tool for her clients. “It allows clients the breathing space their cashflow needs and flexibility when tax estimates are being used.”
Virginia Stallard at Vision Accounting Solutions in Albany agrees. The service has helped several clients who couldn’t meet provisional tax instalments on the due date because of cashflow pressures. “Rather than not pay or pay what they could afford, paying a fee now, then paying the full amount of tax backdated to the original date later allows clients to rest easy, knowing the tax has ultimately been sorted without incurring additional penalties and use of money interest charges. It’s a matter of timing that makes all the difference.”
Chris Cunniffe, CEO of Tax Management NZ says the Pay My Tax facility also helps avoid the high cost of borrowing to pay for provisional tax. “Available from 5.4 percent, it’s less than the cost of a traditional business overdraft – and it’s tax deductible. We don’t need to do credit approvals or application forms.
“With increased demand from customers for self-service, an app was the obvious way to go.”