Published in Australian Financial Review, February 17, 2011

Cash is king is a constant theme for any size and type of business and in the current environment where banks have been tightening lending criteria and the floods have made it harder for companies to rebuild capital, even small businesses should aim to keep their cash flow positive.

All businesses generate most of their cash flow from sales of goods or services. To maximise cash flow some simple ideas can be considered, advises Scott Harrington, director of business advisory services at national accounting firm William Buck.

“If you are supplying customers on account or providing services over a period, ensure that you raise your invoices regularly,” Harrington says. “Many businesses wait until after the month has ended to commence the invoice process. This delay in invoicing could be adding 30 plus days on your collection of the cash.”

He recommends that businesses set appropriate credit and payment terms for their customers. “If you make your terms clear up front then you will have a better chance of collecting the cash in accordance with the terms,” he says.

Matthew Schlyder, a partner of Brisbane-based accountancy firm elliotts, adds that businesses should ensure customers have signed off on their order prior to commencing work and have agreed to the terms.

“Issue your invoices at the earliest possible time but after you have received the signed order,” he says.

Advisers with small business clients regularly hammer home that they must have a focus on chasing outstanding debtors. Harrington advises that if you are worried about client relationships that have been built over time, then employ someone specifically to chase and collect the outstanding debtors once they exceeded their terms.

To assist your cash flow you should also make full use of the payment terms provided by your suppliers. While maintaining a good relationship with your suppliers is important, have you ever asked your suppliers if you can extend the payment terms from 30 to 45 days?

If you give credit to a lot of small customers, you will probably require a computerised collection system that will enable you to track your accounts receivable and improve your chances of getting paid on time.

Doing it manually could be more expensive unless you have only a few customers that can be monitored and followed up with several phone calls.

Harrington has also observed businesses that have a significant amount of cash flow or working capital tied up in stock.

Focusing on reducing stock levels where possible will release these funds back into the available cash.

The key to having a successful and strong cash flow is understanding the components that drive the cash flow and being able to forecast and monitor the cash flow. By actively managing it this will also help identify shortfalls or upcoming pressure that should be planned for.

For the thousands of businesses affected by devastating floods in Queensland and Victoria, as the physical clean-up is completed they need to plan their business recovery and part of that planning will revolve around adequate cash flow.

National business turnaround specialist Vantage Performance has helped many businesses navigate their way through periods of crisis. Managing director Michael Fingland advises businesses going through a recovery to forecast short-term cash flow.

“Cash flow forecasts should be a key management tool in any business, but in disaster situations they are critical,” Fingland says.

“Preparing 13- or 26-week cash flow forecasts under both best and worst case scenarios will help quantify flood impact on your business and highlight periods of cash shortage in time for you to implement a strategy to mitigate these shortages.”

A basic cash flow forecast will take a few hours to create and can be prepared on an Excel worksheet. If you don’t have computer access, ask family, friends or colleagues, says Fingland.

Vantage’s Business Strategy Blog has a link to How To Create A Cash Flow Forecast which gives a step-bystep guide for owners who are unsure about how to prepare a cash flow forecast.

Harrington suggests that businesses consider lowering their financing costs.

Many businesses run a long-term overdraft secured by personal property. If this is the case, you should approach your bank to explore moving to medium- or longer-term debt with the same level of security but at a lower interest rate.

“With interest rates at a current low, there may also be an advantage in fixing the rate for the medium to long term.”

Done in a disciplined manner, proper cash flow management can help businesses take advantage of openings that come their way while at the same time providing a buffer in more challenging financial times.

The worsening financial picture for small business was summed up by Christine Christian, the chief executive officer of Dun & Bradstreet.

“The cash flow of Australian businesses is expected to remain under pressure during 2011,” says Christian whose company, which chases debtors on behalf of clients, also has a large database of accounts receivable that enables the firm to track payment trends.

D&B’s latest analysis of trade payments discovered that an additional 4 per cent of Australian firms failed to pay their trade credit accounts during the December quarter 2010 compared with the previous year.

Worryingly, the number of organisations with severely delinquent accounts that are 90 days or more past due increased by more than 7 per cent.

The rise in severely delinquent accounts can mean that businesses are denied access to their cash for more than four months.

“For small businesses in particular, this type of delay in receiving payment for products or services could push a business into severe financial stress,” warns Christian.