Money is the fuel of business – if your business has the cash it needs WHEN IT NEEDS IT, then that fuel is working for you.
The FLOW of money through your business is every bit as important as the AMOUNT of turnover or profit you show at the end of the year.
Drought and flooding rains
Small Australian businesses often have cash flows that match the Australian climate – long dry spells, followed by sudden downpours.
In many industries, some of that cash flow “drought” is actually baked into the business model.
If you’re an SME operating in an industry where big customers demand 30-day (and sometimes 60-day) terms, then it doesn’t matter HOW carefully you manage the money inside your business.
Delays in the flow of cash into your business will likely cause you ongoing grief and stress. (UNLESS you put strategic tools in place to manage those flows.)
It can feel like trying to wrestle alligators with one arm tied behind your back!
You have good customers. You’ve done good work for them. They pay (mostly) on time.
But that doesn’t help if you’ve spent money on materials, equipment contractors and staff (often weeks or months in advance)in order to deliver what you invoice.
The result? Instead of doing business “like a boss”, you end up in a constant cycle of stress and funds juggling.
Instead of building a great team, making a big impact and taking care of your family the way you wanted to when you started your business – there you are pinching pennies until they scream.
Your annual financials will show a good profit – but the cost to you doesn’t show on the books.
You may need modern, flexible Cash Flow Finance
Many small businesses recognise the need for finance – but all they know to do is to get a bank loan. And the amount that most banks will lend is based on the value of your private assets, not your business balance sheet. Plus the banks typically charge you interest on the total loan, regardless of what your business actually earns.
Resonsive Finance: “It’s finance Jim, but not as we know it”
The same type of entrepreneurial thinkers who brought us smartphones, tablets and the Internet have moved into providing finance – including more streamlined, accessible business finance. Many are offering finance that’s based on the value of your business, not your family home.
I call it Responsive Finance – because it’s ALSO flexible, integrated with your accounting and it’s able to respond to your business needs and business growth.
Many responsive Trade and Debtor Finance tools can be connected to your online accounting. So as your business grows and you invoice more, you can borrow more without more approvals and more paperwork.
Debtor/Invoice Finance – unlocking YOUR money faster
There are three key types of responsive business finance that every SME operator should understand:
- Unsecured Mortgages – based on your business balance sheet. Unsecured Mortgages are great for managing unexpected expenses and actioning new opportunities.
- Trade Finance – based on the value of the business you do, specifically for funding the purchase of goods and services to deliver on your contracts.
- Debtor/Invoice Finance – finance secured by the value of business that you do with your customers (not your private assets).
When combined with a sound overall financial strategy and good business administration discipline, these three responsive finance foundations can turn good businesses into great businesses. It can also turn tired, stressed business managers into satisfied business Operators (with a deliberate capital “O” on the Operator).
The form of Responsive Finance that many SME operators DON’T yet know about is Debtor Finance – also called Invoice Finance.
“Debtor finance isn’t ‘another loan’ – it’s about unlocking YOUR money faster” – Martin Cattach
Debtor Finance – liberation from structural industry cash gaps
Debtor Finance is a fundamental and enabling responsive finance tool for operating in any industry with a structural cash gap.
It typically offers you 80% of the amount your customers will pay you in the next 60 days – NOW. Then the balance (less costs) is paid to you when the customer pays the invoice.
This means that you can:
- Tool up for the next big job
- Invest in better infrastructure
- Take advantage of vendor bulk buy and early payment discounts.
An invoice/debtor finance example
Let’s say that you’re using invoice (also called debtor) finance to access cash now on 30 day or 60 day customer invoice payments.
In this invoice finance deal, you’re paying an interest rate of 12% per year plus a fee of 1% for each invoice “mini-loan”. So if your customer’s invoice is on 30 day terms and they pay promptly, then your costs are 1% in fees and 1% in interest (2% overall).
On an invoice of $10,000, that’s $100 in fees and $100 in interest to put $9,800 in your bank account today to buy stock in bulk or upgrade a computer. Whether that’s “expensive” depends on what return you get on your spend.
There will also be an additional administration cost within your business. Because there will be some extra time required to reconcile customer payments – and manage what happens if your customer pays late.
However, for many businesses, it gives them freedom to grow. It is well worth the investment for them.
If you get an early payment discount of 10% from your supplier, you’re ahead. If your spend gets you a step closer to a new product launch then it’s likely a good investment. If it means you can negotiate a payment plan with the ATO, it could be very helpful.
Could Debtor Finance be a useful tool in your kit?
Answer this question, then read on…
“What would we do to grow/improve our business
IF
we had an extra $50,000 to call on today?”
If you can list 3 significant improvements using that $50,000 which would make you money in the long term, then you may have your answer.
You don’t win a footy game on guts alone – you win with sound strategy and foresight
Sound cash flow strategies and disciplined administration, along with carefully chosen responsive finance tools can dig struggling small business operators out of stressful cash shortfalls.
If you’re tired of wrestling crocodiles and want to get back to the business of growing your business, then schedule a call with Working Capital Strategist Martin Cattach to discuss your needs and your goals today.
