Using credit to address cashflow pressures is one way to unlock growth.
Some $6.12 billion worth of growth opportunities fall through the cracks of Australian mid-sized businesses every year due to insufficient or variable cashflow, according to research released by American Express today. More than one-third (38 per cent) of mid-sized CFOs admit their business has been delayed or unable to achieve a strategic business objective due to cashflow pressures.
Alarmingly, 81 per cent of mid-sized businesses miss growth opportunities every six months or less, with the average cost of each missed opportunity costing Australian businesses around $35,000.
While the outlook for mid-sized organisations is very optimistic, with 65 per cent of businesses forecasting growth in 2017, a Special Report from American Express, Behind the balance sheet: unlocking hidden value in credit, reveals cashflow pressures constrain mid-sized businesses from achieving their full growth potential.
The cashflow management conundrum
An overwhelming majority (81 per cent) of CFOs agree that credit is a good cashflow management tool and have predictable cashflow (85 per cent of businesses). Yet many organisations still opt for cash over credit, rather than using cash to fund business initiatives, and using credit to manage cashflow.
Despite the opportunity presented by credit – whereby cash is kept in the business for longer – traditional methods of cashflow management still prevail. Only 55 per cent of CFOs use credit to manage cashflow, while over a third still use business loans (37 per cent) or an overdraft facility (34 per cent) and one fifth (21 per cent) use invoice discounting.
Martin Seward, Vice President for Small & Medium Enterprises at American Express Australia said by sticking with tried and tested cashflow management methods, businesses are burning through available cash in the bank and limiting their room to drive forward strategic objectives.
“When credit is used to manage predictable cashflow, CFOs can unlock hidden value in their business as well as ease the burden of cashflow management,” Seward said.
“While cashflow management will always be a top priority for CFOs in mid-sized Australian companies, the role of the modern CFO has evolved to become a key strategic lead within the business. In an increasingly competitive economy, the modern CFO cannot afford to miss business opportunities due to cashflow pressures nor expend all their energies pouring over the weekly ebb and flow of cash.”
By using credit as a cashflow management tool, almost half of CFOs said this extra cashflow in the business would help fund staff training (44 per cent), hire staff (38 per cent) or purchase new equipment (44 per cent). Additionally, one fifth of businesses (21 per cent) would increase their investment in innovation and R&D.
“The benefits of using credit as a cashflow management tool are three-fold – an extended interest free period delays upfront payment, keeping cash in the business for longer, while lining supplier payments up with statement cycles helps receivables arrive before expenses are due,” Seward said.
“Thirdly, early payment discounts can be negotiated with suppliers by creating a history of reliable on-time payment.”
Inside Small Business