Dealing with post-Christmas SME blues

The post-Christmas quarter can be a tough time for small and medium-sized enterprises (SMEs), with the traditional seasonal dip in cash flow making it harder to meet outstanding liabilities on time.
Scottish Pacific's head of product development Wayne Smith has been dealing with enquiries from SMEs looking to fund growth after the post-Christmas lull,  or in some cases, looking for funds to meet their Business Activity Statement commitments while they wait for outstanding invoices to be paid.
He says there were four crucial areas directors of SMEs should focus on to keep their businesses on track with cash flow:

  • Debtor days.
  • Creditor days.
  • Stock holdings.
  • Borrowing facilities.

Smith says the cash flow questions directors should ask management include the following: 

  • What are the average debtor days? How does the figure compare to the terms stated on the invoices? How do the terms agreed with customers compare to competitors? What is the prospect of shortening the debtor days?
  • Is the business paying suppliers/creditors to terms? Are the terms tight or generous? Are they the industry norm? Is there an opportunity to negotiate extended terms? Are ATO obligations (reporting and payment) up to date? Slippage here is often the first sign of cash pressure building, according to Scottish Pacific.
  • What is the stock turnover? Are stock holdings at the optimum level? Is the business holding obsolete stock or date sensitive stock that is nearing the end of its term?
  • Does the business have the optimum mix of finance facilities? Has the business recently reviewed its funding arrangements? How are stock holdings funded (creditors days/overdraft/trade finance)? How are debtors funded: overdraft/debtor finance? These are the two key current assets that tie up cash in businesses. Is the business meeting its funders' reporting requirements and not breaching any covenants?

Smith says mistakes directors should ensure their companies avoid include:

  • Debtor days - Look after the basics. Have correct details required on invoices, state payment terms, cross-reference purchase orders and have proof of delivery accessible in the event of query or dispute. Do not assume payment will be made on the due date. Issue regular reminders and make follow up calls.
  • Stock - understand which lines are fast moving/slow moving and ensure holdings are related to speed of movement. Do not hold on to stock that is date sensitive or in danger of becoming obsolete. Turn it into cash at a discount (be prepared to take the hit to profit margin to turn it into cash).
  • Creditor days – do not pay before due date. But equally do not push payments out too far without agreement. Make sure the business is not tied to terms that are shorter than the industry norm. Be careful about paying early for discounts as this helps profitability but not cash flow.

Smith cautions that relationships with funders are key. He says directors should keep up to date with reporting and ensure their companies operate on a “no-surprises” basis.

“Provide the required information in a timely and professional manner because facilities being withdrawn or reduced will have the biggest negative effect on cash flow. Regularly review options and be aware of what is available in the marketplace,” says Smith.

  • “Ensure there is headroom for growth - don’t wait until facilities are fully utilised and there is pressure to keep within limits.”

Smith says signs of looming trouble directors should keep a look out for are:

  • If debtor days extend outside industry norms, find out why: are customers struggling to pay or just won’t pay? Is there an issue with collections activity (for example, with statements, reminders and follow up calls)?
  • Are stock holdings increasing out of sync with sales? Is there a build up of slow moving stock items or out of date stock? Is too much stock being held? Is it possible to reduce stock holdings? Move towards JIT (Just in time).
  • Creditor days lengthening without the suppliers/creditors agreement. This could be evidence of cash pressure building, as could ATO obligations not being met on due dates.
  • Pressure on funders' facility limits, lending covenants being breached or funders looking to reduce facility limits. These could be signs of cash pressure and potentially a lack of confidence from the funders.

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