Know your cashflow levers

money managers

Most companies continue to do well in an uncertain environment, however, many small businesses are suffering from the consequences of low-growth. Over the past two years as the value of commodities has fallen, real estate prices have skyrocketed, and high labour costs have drained margins, SMEs are finding themselves more exposed to risk.

Most businesses react to uncertainty by building cash reserves and putting off investment, with no understanding of their cashflow levers. This is what is happening in Australia.

In a normal environment the central bank would lower rates and kick start bank lending but post-GFC, central banks are running out of room to steer the economy based on monetary policy (interest rates). With recent cash rate reductions and a persistently strong Aussie dollar, the RBA still has room to impact exchange rates. The big four banks in Australia are in a tough spot (as demonstrated by their recent failure to pass on the full cash rate reductions). As they rely on strong dividend payouts, and international funding markets to fund lending, banks are increasingly unlikely to kick-start the economy through lending growth to SMEs.

As a consequence of the sluggish economy, SMEs are left to their own devices to manage cashflow problems, which are simply out of their control. To be prepared, SMEs need to ensure that cash reserves, cashflows and credit limits are sufficient to meet day-to-day and growth needs.

Cashflow can be one of the biggest problems for SMEs and juggling competing interests to stay cash positive is a constant struggle. A recent study revealed that for Australian SME owners, cashflow is a major stress issue, with 32% of SMEs dipping into their own accounts and 44% using credit cards as the primary tool to manage cashflow, working capital and business investment.

This is why financial planners and accountants want SMEs to project their cashflow – even your banker requires a cashflow projection for your business over the next 12 months before they extend you funds.

Until recently, the process of building a cashflow forecast was fraught with challenges and complex spreadsheets. Today, that has all changed with cloud accounting systems and inexpensive forecasting tools. For much less than the cost of a coffee a day, small business owners can access tools that give them an up-to-date view of their cashflow in minutes.

Without knowing how long you take to collect an invoice or to generate and complete an order, you’re not in a position to strengthen your business. This cycle – the order-to-cash cycle – is what drives your business. Once you have a clear line of sight of this, you can understand how much cash your business consumes as it grows, and what cashflow levers you have to accelerate cashflow (including debt) when you encounter unplanned volatility or natural seasonality, tax payments and superannuation payments. Know how much buffer cash you need and have the power to make actionable insights.

Using technology to put your business in a better position isn’t just about embracing the latest cloud tools, it’s about future-proofing your business by seeing “possible” futures and charting a path through difficult times. There can be high financial demands associated to running a business in a difficult economic environment, which are made even harder as banks limit lending to SMEs. Business owners need to start thinking about leveraging alternative financing options and peer-to-peer financing is a clever way for business owners to address temporary dips in cashflow.

For time poor and stressed small-business owners, it’s not that surprising that they are failing to capitalise on these emerging finance solutions – who has the time to research new solutions when they’re focused on cashflow problems?

Boyd Pederson, CEO and Founder, Bigstone