Priming the cashflow pump

Cashflow is the lifeblood of all businesses. Maintaining a strong flow requires careful planning, discipline, and some key provider partnerships.

If you own a business, then it’s likely that cashflow, or the lack thereof, is the number one issue that keeps you awake at night. When a business is starved of everyday funds, even if invoicing and credit control management is up to scratch, it can open up all manner of problems going forward – not least of which, the ability of the business to thrive and grow. 

There is no shortage of funding mechanisms and tools out there to help a business raise capital, such as bank overdrafts, opening the door to investors and business partners, or opting for one of the many online crowd-funding options available. 

However, the answer to your cashflow and growth frustrations could be staring at you each time you open up your receivables ledger. The funds that are locked up in your receivables ledger may well be the funds required to transform your business from a pale, struggling entity to a rosy, healthy and thriving enterprise. 

Debtor or invoice financing has become an increasingly popular means of helping Kiwi businesses through the year’s cashflow potholes and speed-humps. 

Lock Finance’s lending manager Sean Hilton explains how both their full service factoring and debtor finance products assist B2B clients by smoothing out cashflow and providing access to up to 80 percent of the debtors balance immediately. “Both products can be used to fund sales growth, an acquisition, or assist in the funding of IRD arrears. And there is no need to provide additional security – so the family home is unencumbered.” 

The fact that the business owner’s home is not required for security remains one of the key attractions of debtor and invoice finance. However, as Hilton points out, his company is not in competition with the local banks. “They serve different markets and, in fact, we’ll often work together on a joint proposal. 

“Lock Finance is more flexible and less prescriptive than a traditional bank, with less emphasis on debt servicing and balance sheet equity.” 

Hilton explains the three major products offered by Lock Finance. 

“Full service factoring suits a start-up business normally excluded from unsecured bank funding and the facility grows in line with increasing turnover.” 

Management of the ledger becomes Lock’s responsibility, he says, thereby saving on staff costs. 

A client example is an established ice cream manufacturer with a turnover around $1.5 million that had a $30k overdraft with its bank, which was not prepared to increase the facility.  

“With a receivables ledger of $300k, Lock Finance approved a factoring facility with a limit of $250k in order to provide working capital.”  

The second product is debtor finance. 

“It’s a ‘non-disclosed’ product, explains Hilton, “meaning debtors are unaware of Lock Finance involvement; which appeals to many clients.” 

The client retains the management and control of the receivables ledger, and therefore it is cheaper than factoring, he says.   

“It suits a more mature business with established processes.” 

He recalls a fast-growing labour hire company that had exhausted its ability to secure any higher working capital facilities and was referred to Lock Finance by its bank. “With the bank overdraft limited to $300k, we approved a debtor finance facility with a $750k limit in order to assist the client achieve their growth plans.” 

For businesses trading overseas, purchase order trade finance can be a useful enabler. 

“Lock Finance can pay 100 percent of an overseas supplier’s invoices against confirmation of supporting domestic purchase orders,” explains Hilton. 

“We match supplier payments with subsequent debtor receipts – thus avoiding any additional security required for funding imports.” 

He says a relevant client example is the equipment importer that had an average trading record, due to investing heavily in their sales process. It had achieved confirmed orders for equipment of $1.2 million.  

“Their bank was unable to provide increased funding, including any trade finance,” he recalls. “We provided a debtor finance facility of $500k and a purchase order trade facility of $300k. These facilities enabled the client to fulfil these and future orders, increasing turnover by 35 percent and achieving very good profitability.” 

Hilton says qualifying a client depends on the maturity and turnover of the business. “Initially a copy of the debtors ledger and management accounts would enable Lock Finance to provide a good indication of appetite. If client then elected to proceed, additional background and financial information would also be required,” he says. 

With the banks tightening their credit policies in response to liquidity issues, Hilton says it’s creating an opportunity for cashflow enablers such as Lock Finance to fill the void.  

“With the younger generation starting businesses, who may not yet own a home or have little equity, enabling the business to fund itself can assist greatly in achieving sales targets.” 

He says the process of debtor finance or factoring products usually requires repetition. “However, once clients start using the facility they quickly gain comfort and recognise the benefits of improved cashflow to their businesses.” 

His advice to all business owners is to keep an open mind [on finance options]. “Rather than focus purely on the cost of finance, more attention should be on the cost of forgoing increased growth.”   

Use provisional tax to improve cashflow, grow your business

Cashflow management and sourcing finance for business growth. 

These things can weigh heavily on a business owner’s mind. They may even cause a few restless nights too. 

However, they don’t need to. 

Tax Management NZ (TMNZ) is an IRD-approved tax payment provider that offers some solutions to the above by using something that many small business owners don’t exactly like: provisional tax. 

Cashflow management 

Cash is king. It’s the lifeblood of a business, essential for covering day-to-day costs. 

Provisional tax payments are one such expense that can test cashflow reserves. After all, IRD expects these obligations to be settled on the dates it sets. It will charge interest of 8.22 percent and late payment penalties if you don’t pay. 

Our clients often tell us the 15 January provisional tax payment is problematic. Moreover, findings from Xero’s Small Business Insights showed that January 2018 was the weakest month, with only 38.6 percent of respondents being cashflow positive. 

One option a business owner should have in their toolkit is Flexitax. You can use it to manage cashflow if you: 

• Find it difficult to put money aside for provisional tax (or an unforeseen circumstance requires you to spend said money). 
• Want to mitigate the financial consequences if you cannot pay on the dates prescribed by IRD. 
• Are a highly seasonal business and want to align provisional tax payments to when you earn your income. 
• Want to avoid the hassle of entering an IRD payment plan or the high cost of borrowing to pay tax. 

How Flexitax works 

Flexitax lets you pay your provisional tax in instalments, reducing IRD interest costs by up to 30 percent and eliminating late payment penalties in the process. 

Unlike an IRD payment plan – which requires you to provide certain financial information and details about how and when you will pay the tax due – the arrangement will not be affected if you miss a payment. 

That’s because there are no set amounts or payment dates. You pay what you can, when you can, depending on your cashflow.  

TMNZ’s interest is recalculated on the core tax remaining at the end of each month. 

Finance and working capital 

Whether it’s buying more stock, a new truck or reinvesting in your business, paying for these things costs money. 

And therein lies a problem for many small business owners: the ability to source funds. 

Granted, there are several choices available when it comes to accessing the working capital required. A bank loan, overdraft, credit card and an unsecured loan are just some. 

But again, it’s not that simple. There can be a few hoops to jump through as part of the approval process and you will likely have to use an asset as collateral. If there is no approval process, then chances are you will be up for double-digit interest.  

However, there’s another option at your disposal: Tax Finance.  

You will find this useful if you: 

• Are looking for a cheap source of funding that doesn’t affect other lines of credit. 
• Want to keep headroom in your existing lending facilities. 
• Don’t wish to go through the rigmarole of the normal lending process. 
• Want the certainty of a fixed interest cost. 
• Feel there is more to gain financially from being able to keep money in your business instead of paying tax. 

How Tax Finance works 

Tax Finance lets you defer the full payment of provisional tax to a date in the future, without incurring IRD late payment penalties.  

You choose when you want to pay, and pay a fixed, upfront finance fee to TMNZ to put the arrangement in place.  

The finance fee, which is based on the amount of tax due and how long you are deferring your payment, is cheaper than other forms of traditional finance such as a business overdraft or unsecured loan. For example, it only costs $215 to defer a $10,000 provisional tax payment for six months. 

Approval is guaranteed, and no security required. 

Don’t forget to download our free provisional tax guide for all you need to know about managing your tax obligations and making informed decisions to suit your business needs.    

This article supplied by Tax Management NZ. 
www.tmnz.co.nz