How to maximise the cashflow of your Australian SME

(00:00) Good morning. What I’m going to talk about today is small and medium enterprise finance. I’d like to go through some various methods of finance that are available to small business today and particularly cover what’s available and the sort of methodology that could be applied to assist clients in this area.

What I’m going to cover today is firstly the finance revolution that we’ve seen occur – about trade credit and how small businesses finance their customers. I’d also like to talk about debtor and trade finance – and we’ll also be covering receivables management finance which is a new innovative product for small business. I’ll also be talking about some of the innovations in finance that we’re seeing today.

(00:49) Let me first talk about the finance revolution. What we had previously and I’m talking 20 or 30 years ago, we had a banking system that used to lend to small business. Today, unfortunately, our banks have been converted into building societies. They don’t lend to small business based on the business.

(01:08) If they do lend to small business, they lend it secured by mortgages over residential property. And this is one of the things that many people are falling into the trap of. Business is a risky situation and risking your personal assets to secure your business is not necessarily a great strategy for moving forward – particularly as we are in very uncertain times.

(01:31) And let me illustrate how that works. We have a thing called trade credit. Currently between $1.5 and $2 trillion is lent to businesses via trade credit and that’s the trading terms we often give when we sell products to our customers or we sell products to other businesses. We have a thing called trading terms.

(01:54) the timing difference between where we have to pay for the products we use, we add value to them and then we put them out on the terms to our customer, we call the cash cap. And this is normally expressed in what we call the cash conversion cycle. And this is a terribly important thing that many small businesses don’t understand.

(02:12) Now, what I’m going to show you are a couple of circular diagrams here because in my to my way of thinking, finance is a circular operation. Often when we see banks giving term loans or perhaps overdrafts, what they do is they give us a big pond of money and we eventually spend it down. The sort of funding that I think small business needs is a rotating funding where we spend, receive income and can go in a cycle so the bit the funding cycle can match the growth of our business.

(02:43) Now here I talk about the cash conversion cycle which is a terribly important item. Let’s say for example, you had debtors of $250,000 and you had a cash conversion cycle of 45 days. That’s meanings that your clients are paying you 15 days into the following month of a 30-day cycle. So, you’ve got your outstanding for an average of 45 days.  

(03:08) With one client, we implemented the Dunning process, which is a process for automated collections. I’ve written a white paper on the Dunning process and anybody would like to get a copy, I’m happy to mail it to you. The Dunning process enables you to build a collection cycle that you can run through continually.

And this particular client had $250,000 in outstandings.(03:31) They brought their data days down from 45 to 30 days and that actually gave them an extra $80,000 in working capital. 

So looking at how you manage your receivables is a very important part of small business strategy.

Now what I use nor normally to accelerate this cycle is a thing called debtor or invoice finance. It once again is a circular position and what that does for you it means that when you draw an invoice a debtor funder will give you up to 90% of the value of that invoice from day one.

(04:09) Then when your debt is eventually collected where the receivable is paid that the balance of 10% is remitted to you less balance and charges. This is a very effective low cost way to finance business growth. I see so many businesses taking out expensive unsecured cash flow loans. Debtor finance is roughly half the cost of many of the cash flow loan providers.

(04:32) So what happens – we see people find that cash flow gets a little tight – particularly when you grow because if you take your business that has a million dollar turnover it’ll possibly have say $200,000 in receivables which means you need a minimum of $200,000 in working capital 

But as you grow your business which is as you scale up – let’s say we take that business to $2 million worth of turnover – we have a $400,000 worth of receivables. We need $400,000 worth of working capital to do that business. So a product like debtor finance stops that drain on working capital and changes your liquidity. 

Many businesses where I’ve implemented debtor finance, we have clients losing sleep at night worrying about cash flow. It’s not actually cash flow. They don’t have a cash flow problem. They have a liquidity problem because they just do not have enough working capital to run their business.

(05:24) Implementing debtor finance can change that cycle – and that changes the way many businesses can then grow because they had the addition of liquidity. So that means that they can use the liquidity they’ve gained from debtor finance to pay suppliers early and pick up supplier discounts. There are many benefits a business can use.

(05:45) So one of the tools I use to shorten the cash gap and the cash gap being when I have to pay my suppliers until I actually get paid is debtor finance.

And the other tool I use is a tool called trade finance. So debtor finance funded my receivables here. Trade finance is basically a facility to pay my bills but more or less to extend the terms that I have to my creditors.

(06:08) So in the simple process that trade finance follows, let’s say that I have to pay and I’ll use an example of a contractor that I have as a client. He has to pay for his concrete 30 days, but he works in the building industry and often he doesn’t get paid by his builders until the job’s complete AND THEN the trading terms with the builders may mean he does not get paid for 60, 70, 80 days.

(06:31) So he needs an enormous amount of cash to cover that cycle. With trade finance, he can have a trade financier that will pay his concreter at 30 days normal within his terms and extend those terms to another another 60 days. So he’s closed his cash gap by extending his terms with his suppliers to match the terms he’s getting out of his customers.

(06:54) So this means he shortens the amount of working capital he needs. Trade finance is a very effective tool. 

The other tool is a product called receivables management finance. And that’s a tool that’s designed specifically for small businesses. And the easy way to explain how this works is an example, I had a diesel mechanic. And this diesel mechanic used to go around to building sites. He was a one man show.

(07:17) He was he was grossing $200k a year, but he would go to a builder, fix their diesel pump on site or their concrete pump, write out an invoice on his little duplicate book, and hand it to them. and then move on to the next site. What happened is he had no back end to manage his situation. So with receivables management finance, you can actually use uh like a data finance type facility.

(07:44) So as he drew that invoice up, he could give it to the client, it was acknowledged the invoice was there and receive 80% of that invoice funding. But then he ALSO had a back end – which was the financier that has professional collection team that would follow up on that client’s bill and make sure it got paid. And so then once it was paid he received the balance of the 80% less fees and charges.

(08:08) This makes it very easy for a small business to grow without increasing headcount and without worrying terribly much about their cash flow. Because they’ve managed to get some liquidity. they can do what they do best, which is fixing diesel pumps in this case, and they don’t have to increase their headcount. 

And not only that, in small business, we get a conflict.

(08:27) And the conflict in small business is often our best customers are our best friends or we have good relationships with them. And so therefore, it become quite difficult to ask for payment. And nobody – and I can tell all the people in this room and particularly accountants ringing their their better clients and asking well look you haven’t paid my invoice for 90 days – is not something we look forward to.

(08:52) In this case we can use a third party – being the financier – to make the call and they can ask for the funds and the actual example I have is one of his best customers rings up and said hey these guys are calling me every 24 hours asking for my money. And you say well it’s 60 days overdue. when are you going to pay me? So that drives the call to you rather than you having to chase for the funds.

(09:15) Now there’s another product I use quite a bit and I often use this as an interim stop gap and that’s unsecured overdrafts. Now part of that finance revolution I referred to earlier is we’ve seen a large number of fintechs move into the finance space basically displacing the banks because I mentioned earlier the banks are building societies and all they wish to do is mortgage your property.

(09:40) Whereas fintechs are looking for ways to lend their funds. They do things like debtor and trade finance and unsecured overdrafts and many exotic type finance products they produce these days. But the value of an unsecured overdraft is that it be can become a quasi cash reserve. So let’s say the cost of holding a $100,000 unsecured overdraft for a business with reasonable trading is $500 a year.

(10:04) So let’s say we come to that terrible December, January, February period where no one gets paid and you’ve got to service large payrolls, holiday pays. An unsecured overdraft is a product you can draw down on, maybe meet that short-term in seasonal cash flow and pay it back and you only pay interest when the money is outstanding.

(10:27) I find it very flexible and often when businesses come to me, they have liquidity shortages. One of the first things I do is implement a unsecured overdraft and then generally put in something like the debtor finance we covered earlier. And this means that when the debtor finance is in place, we pay back the overdraft, but it sits there as a at a $500 holding cost per year for $100,000 in liquidity.

(10:49) This means that in uncertain times like we’re facing now, we have increases in energy costs, changes in fuel costs, and you know, some general uncertainty in the economy, you have a cash reserve of $100,000 you can call on if you need to. And particularly in times like this, your competitor might go broke down the road.

(11:09) You might be able to buy his stock at higher sale prices. If you have a $100,000 overdraft undrawn, it gives you a lot of flexibility to to manage and move your business forward and to take advantage of opportunities. 

Now, I want to talk about some innovation that I’m seeing in finance. And firstly, there’s a company called Arch and what ARCH do is they’re basically a credit card provider.

(11:32) Now often smaller businesses use things like AMEX facilities as a trade finance facility. In other words, they’ll pay a bill that’s due in 30 days on their Amex card and that’ll give them 60 days funding because they don’t have to pay AMEX back for another 30 or perhaps 45 days. So, once again, it’s all about managing a cash cap issue in small business.

(11:55) So Arch have a system where they allocate master cards. They can be virtual mastercards. They can be issued to your staff members. They can be cancelled. Credit limits can be fixed and it gives you a way of basically managing a lot of your expenses. And you know let’s take someone like an electrician or a plumber who has a team on the road and they get on site and find they need you know a 2 cm bit instead of a 3cm bit to do the job.

(12:21) if they have something like a credit card, they can go to a local provider, use that credit card to buy the additional piece they need to finish the work. Because while they’re sitting there and standing around, they’re costing real dollars. And it means by empowering some of your staff with the ability to use a card is a viable business process because time is money and if you’ve got a team standing around because they haven’t got the right part, it’s not a bad thing to do.

(12:47) The other provider I want to talk about which is another innovation is called Luca Plus and Luca Plus are a specialist trade financier but mainly in the small business market and the sort of things they do is let’s say you’re a retailer and in retail we don’t have debtors that we can use for balance sheet lending. 

So Luca actually plugs into your accounting system.

(13:11) They plug plug into Xero or MYOB. And what that does, it gives them an idea of your balance and trading history, and they will say we’re coming up to Christmas or Easter. We’ll lend $50,000 to you pay us back. Or make it $40,000 because it’s easy for the arithmetic. 

Pay us back at $10,000 a month over the next four months. They do that very simply.

(13:34) it’s just like applying for a credit card and once they get they’re plugged into your accounting system they have an understanding of how your business is and it means that a someone like a small re retailer can buy stock get it in early to meet seasonal variation. 

Another product that I use is from a company called Cogsflow and Cogsflow manage to lend they basically work in e-commerce space but I have got them working in a couple of companies that aren’t based in e-commerce.

(14:04) One of the advantages of lending in the e-commerce space is it can be relatively easy once a business is established because of the analytics that are provided. If you’re selling something on Amazon, you know, if you spend $10,000 in marketing, you’ll get $100,000 revenue and generally it scales pretty much linear.

(14:25) So, if you spend $20,000 in marketing, you’ll get $200,000 in sales. Because these analytics are so good, companies like Cogsflow can assess your financial position and your trading history and potential trading and will then advance funds to provide stock for your business. And what they do is they uh put a charge over that stock and it’s not the cheapest funding around but it can be very flexible if you have a good high margin product.

(14:54) Now, the last bit I want to talk about is if you’re going to fund your small business, you don’t need products. You need a strategy. And my actual title is I’m a working capital strategist because I particularly specialise in this area. And what you need to do is you need to review and understand what your client requirements are.

(15:16) Build a business case and a financial case to get them the funds. Get them approved and provide those funds to the business. and then consistently monitor. And as you noticed when I had the debtor and trade finance slides up, these are circular propositions because these sorts of funding situations can grow as you grow.

 If you have half a million dollars worth of debtor finance and your debt has grown to $1 million, an approval for an extra million dollars worth of data for the extra half million dollars of data finance is very easy to obtain because there’s a concentrating history.

All you’re doing is growing a business. You’re producing more invoices, producing more product, and they get paid. So the monitoring situation is terribly important because what we need to do as a business needs to scale and grow. They need financial support that grows with them.(16:09) They don’t need a bank that will put a mortgage over their property. 

Things like unsecured overdrafts are put in place in three or four days. Debtor finance two weeks. So these are are products that are designed to be implemented into business quickly and to overcome liquidity shortages. 

I just wanted to carry a little bit on my track record.

(16:27) I’ve been specializing in this area for 16 years plus. I’ve financed over $410 million worth of product and I have a 97% satisfaction rate from my clients because I don’t do what in lending we call it set and forget. And that’s what a bank does when it does a mortgage on your house. You don’t ever talk to you again as long as you make the payments.

(16:49) I take a proactive step with my clients and keep talking with them, understanding their business objectives, understanding how they wish to grow and facilitating more lending and advice and experience that I have in many business areas. 

What I’d like to encourage you, I have a code up on the screen if you’d like to book a working capital strategy session with me. (17:13) What I do is uh these are with no obligation but if you get an understanding of particularly from the accountant and the bookkeeper and the client you can put together a financial strategy that’ll take stress out away from your client provide them with the liquidity and the ability to grow.

 Can you tell me, is there anybody here who has clients that do have liquidity and cash flow problems or do they hear from clients saying that cash flow is their number one concern? I’m getting a few nodding heads and a few hands up. Yeah, this is a common situation.

In most cases, I can provide solutions to this that are viable and will enable their businesses to grow. Thank you very much.