Cash flow tips for fast growth SMEs

With insolvency rates at a record high, how SMEs manage their cash flow will have a major impact on their business survival. Here are 4 tips on improving your cash flow.

According to ASIC’s external administration appointments statistics, insolvencies are the highest on record since the original Global Financial Crisis (GFC).

Latest insolvency figures to December 2012, show that 10,632 Australian companies are struggling to stay afloat, 44 percent higher than the historical average and 12.7 percent higher than 2009, at the height of the GFC.

Michael Fingland, CEO of Vantage Performance, believes that forewarned is forearmed, and small to medium sized businesses in particular should be closely scrutinising their future cash flow.

“Over the coming 12 months we anticipate lending conditions will tighten even further for SMEs, so sweating your working capital for cash flow will be a key positive step you can take,” he said.

Here are Fingland’s top tips for improving your cash flow:

1. Test your business and cash flow: build in worst case scenarios

What if you lose that major customer? What if customers take longer to pay? What if sales/margins continue to decline? What if you have a serious bad debt? How would your cash flow survive one or more of these events?

Consider selling non-core or surplus assets. In tough times be prepared to decrease the size of the business to survive, rather than chasing revenue. A reduction in turnover can actually have a positive impact on cash flow if you manage it correctly.

2. Sweat your working capital

Look at your receivables ledger. Get on the phone, call them, record answers and follow up.

Look at your creditors and see if you can negotiate better terms.

Try to rationalise the number of suppliers you have. You can often obtain better terms as you will be providing greater volume to fewer suppliers.

Review your stock holdings. Get it in your bank account and cull obsolete or slow moving stock. If your clients aren’t buying the stock then they don’t want it or the pricing is wrong.

Reconcile your bank account daily and produce a 13-week cash flow forecast, then check your forecast for accuracy.

Slowly refine the cash flow forecast so you have no surprises. When you get to the stage that you can see “holes” in cash flow and start taking actions ahead of the hole, that’s when you know you are regaining control of your business.

3. Consider outsourcing your manufacturing or logistics operation

If you manufacture in-house, you are most likely committed to paying wages weekly.

If you move to an outsourced model, you are now paying that supplier 30-60 day terms.

Fingland said this gives you a permanent improvement in cash flow equivalent to one to two months’ wages.

4.  Look at a sale and lease back for property and other major assets

To demonstrate to your stakeholders that you are prepared to make the hard decisions, investigate a sale and lease back option on your properties or other assets.

The proceeds can be used to pay down debt, which reduces pressure from your financier, and with the right strategy and assistance, you may be able to obtain agreement from your financiers to allow some of the proceeds to be retained for working capital.

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