With signs that the global financial crisis is over and the Australian economy forecast to grow strongly in 2010, it’s time to get set for growth. The Commonwealth Bank’s Symon Brewis-Weston explains how to fine-tune your business finances so you can pump up the volume.
It’s official — according to Ken Henry, head of the Australian Treasury, “What people have called the global financial crisis, that has passed, I think it is safe to say.”
Glenn Stevens, Governor of the Reserve Bank, seems to agree. “Now we must turn our attention to the challenges of managing an economic expansion,” he recently told a parliamentary committee.
In its January World Economic Outlook, the International Monetary Fund forecast that the Australian economy will grow by 2 per cent in 2010 and 3 per cent in 2011. That’s a sharp increase on the sluggish 0.5 per cent growth we recorded in the year to September 2009.
For small-business owners, all of this is cause for celebration. Yet it’s also a good reason to re-examine your business finances and make sure you’re in shape for the upturn. Because nothing tests a business like rapid growth — and it seems that growth is what we’re going to get.
Why fine-tune your finances?
As your sales grow, you need to invest more back into your businesses — hiring staff, buying supplies and equipment, perhaps even moving to larger premises. You also have to process more invoices, more payments, more tax and (hopefully) more profits.
That’s why it’s so important to be prepared. Unless your financial systems are fast, efficient and as automated as possible, higher sales volumes can stretch them to breaking point.
If you spend large amounts of time processing payments manually, then you’re facing significantly greater administrative overheads at best. At worst, you could find your finances spiralling out of control, as you scramble to keep tabs on cash flow.
Then there’s the question of how you fund all of that new investment. Depending on the scale of your growth, revenue from sales may not be enough. Once again, the key is to plan ahead and make sure you have access to capital before you expand. Nothing’s worse than trying to find funding when you’re under pressure and time is running out.
So here are some tips to help you re-engineer and stress test your finances ready for the year ahead.
Step 1: Take control of cash flow
It all starts with your business plan. Put together some growth scenarios and see how they affect your cash flow and your working capital needs. Then make sure you have a system in place to monitor your cash position and track your progress.
Your goals
- Have constant access to up-to-date information about your total cash flow position.
- Reduce manual processing.
- Reduce transaction costs.
Tips
- Make the most of today’s powerful online business banking tools. They can give you complete visibility and control of your cash flow around the clock, and integrate with your payroll and accounting systems.
- Take care when selecting a business transaction account. Your account is the hub of your business cash flow system, so it should give you easy access to your cash, with a range of options for moving money in and out fast. As far as possible, it should also have fee concessions, so you can focus on managing your cash, rather than worrying about the cost.
Step 2: Accelerate receivables
Without careful management, accounts receivable can quickly get out of control. After all, a sale is not complete until you’ve been paid in full. That’s why you need to make it as easy as possible for your customers to pay you, while minimising the time you need to spend processing each transaction.
Your goals
- Reduce the time lag between making a sale and putting the money in the bank.
- Reduce manual processing.
- Make it easy for customers to pay.
Tips
- Electronic receivables solutions like BPAY, direct debit, cards and EFTPOS put cash in your account faster and make it easier for customers to buy from you. They also make it easier to track and reconcile payments, slashing paperwork and administrative costs.
- Use online banking to keep track of cash inflows across all your accounts and download reconciliation files to your accounting system.
- For the right business, Receivables Finance can give you up to 80 per cent of the value of an invoice within 24 hours — so you get paid most of your cash upfront, then repay the bank when your customer pays you.
Step 3: Create a safety net
Every business needs a little extra cash from time to time. If you’re expanding rapidly, you may also need some longer-term capital for new assets. So it’s important to plan ahead and make sure you’ll have access to the cash you need when you need it.
Your goals
- Access extra cash when cash flow is tight.
- Access long-term capital without starving your business of cash for day-to-day activities.
- Drive down your overall cost of funds.
Tips
- A business credit card, overdraft, or line of credit can provide a short-term cash injection. You only pay interest on the money you use, so you can keep costs under control. In the meantime, you have the confidence of knowing that there’s a cash flow safety net if you ever need it.
- Business loans or asset finance can be good choices for longer-term capital.
- By choosing the right financing option for each purpose, you can reduce your overall cost of capital. Your business banker can help you choose.
- Try to match the life of a loan to the life of the asset you’re buying. That way, the asset can potentially pay for itself from the income it produces.
Step 4: Make the most of cash on hand
Most businesses process large amounts of cash earmarked for a particular purpose, like GST or payroll. By putting that cash to work, you can earn a little extra revenue, while still covering your obligations.
Your goals
- Maintain cash reserves for GST, payroll and other obligations.
- Make every dollar count.
Tips
- By parking cash on hand in a high-interest savings account, you can earn extra revenue, even if you’re only holding it for a day or two.
Symon Brewis-Weston is the Executive General Manager of Commonwealth Bank Local Business Banking, a specialist division dedicated to the needs of small business clients. For further information please visit http://www.commbank.com.au/business.
Important information: As this advice has been prepared without considering your objectives, financial situation or needs, you should before acting on this advice, consider its appropriateness to your circumstances. Commonwealth Bank of Australia ABN 48 123 123 124.
