Economically things are going up, but the wholesale industry still has challenges leading up to Christmas with managing cash flow. So how can businesses keep the cash flowing this Christmas?
A recent report by Dun and Bradstreet (released in October 2009), titled – ‘Economic recovery comes with challenges for Australian firms’ – found that close to 38,000 Australian firms are at high risk of distress this financial year, despite signs the Australian economy is on the mend.
According to the credit data firm, the services sector has in excess of 1,300 firms respectively categorised as “high risk of experiencing stress this financial year”.
The latest research provides a warning to Australian executives that the economic recovery won’t be all smooth sailing and that risk and cash flow management is critical to a company’s success, regardless of where they are in the business cycle.
It provides an important reminder that a continued vigilant focus on cash flow and credit risk is absolutely critical during a period of economic recovery.
Despite the excitement that comes with the recent resurgence in retail activity, businesses often forget that a sale, which doesn’t get paid or is paid well past due, has significant detrimental impacts on cash flow.
With negative cash flow often the primary cause of business failure, those executives whose focus waivers could find themselves as another statistic on the failed business register.
Dun and Bradstreet also reported in ‘Payment days provide further evidence of improved conditions’, the payment terms of Australian firms have declined for the second consecutive quarter, providing further evidence that local economic conditions are improving.
A fall of three days since the previous quarter and 5.6 days in the past six months has reduced terms to 51.8 days, a level which is just above pre-crisis terms.
According to the firm, the Wholesale Trade sector showed it took 51.2 days for businesses to settle trade payments; a slight improvement on D&B’s 2008 report, which showed businesses took 54.5 days to settle trade debts.
Business-to-business payment data is a strong indicator of the cash position of firms as it reveals how current obligations are being paid. Therefore, the latest trade payments data provides a clear indication that the Australian business environment is improving, however now is not the time for businesses to relax thinking the worst is behind them.
Many wholesalers could potentially experience a period of stress because they have the added stress of meeting the seasonal demands leading up to Christmas. It can be a challenging time as they need to meet capacity with everyday cash flow. Suppliers are under a lot of pressure and there will be casualties.
Debtor finance – the cash flow financing solution that turns trade debtors into much needed cash in the bank – can be a very effective way to ensure this challenge is met.
With the holiday season fast approaching, the timing is now right for a focus on cash flow health and ensuring businesses are prepared to take on the challenges for 2010.
One of the benefits of debtor finance is that it converts trade debtors into cash. The business sells its invoices to the debtor financier in return for receiving a sizeable proportion of the amount owed, up to 90 percent, up front in cash. The remainder of the invoice value is paid when the invoice is paid, less a small fee.
With debtor finance you no longer need to offer customers a hefty two and a half to five percent discount to encourage prompt or early payment; you don’t need to give away a slice of your profits to improve your cash flow. The money you generate from debtor finance can go towards paying your own suppliers and negotiating a discount for early payment. The result is that not only do you pay less for your supplies, but you can also offset the cost of the debtor finance facility.
However, a common misconception held about debtor finance is the complexity of administering it. Advances in Information Technology have reduced the administrative requirements for debtor financing so all that is generally required is to draw the data from your accounting software such as MYOB or QuickBooks and to upload it onto your financier’s website.
The entire process is almost seamless and has reduced the cost of debtor finance to around half the cost today of a similar facility ten years ago.The basics of putting together a debtor finance package are relatively straightforward. You will need to prove that your business is in a sound financial position and the financier will analyse your debtors’ ledger assessing it for the quality, the aging and the spread of debtors.
In some cases you’ll be able to be selective about those debtors you hand over to the debtor financier, in other cases it will assume all of them.
So, next time you look at your business’ cash flow, ask yourself if there are things that you could do if you had cash in the bank rather than debtors on the books? If there are, then debtor finance might be just the financial tool you’re looking for to get your business over the Christmas cash flow hump.
– Rob Lamers is the CEO of cash flow finance specialist, Oxford Funding (s subsidiary of Bendigo Bank and Adelaide Bank).
People who read this, also liked:
12 tips for a cash happy Christmas