Top Cash Flow Problems Facing Australian SMEs


Why do businesses fail? The rate of small business failure has been a subject for much research and speculation over the years and a lot of figures are often bandied around for all those tough entrepreneurs that dare to dream. Most businesses will fail within the first 5 years of operation and a major inflection point for many of these businesses is usually the point where they begin to experience serious cash flow issues. Businesses also fail due to an inability to secure quick leads and pay off suppliers but all these often wind back to your inability to maintain a positive cash flow over the long haul. Not only do you have to stay on top of the current cash flows, you must also anticipate future rising costs and plan accordingly.

The typical small business entrepreneur is often obsessed with how to maintain a positive cash flow and keep the business afloat. While they will be having their hearts in the right place, it will all be futile if they don’t take care of the nuts and bolts that make a positive cash flow possible.

The most vital of these are forecasting and cash-flow projections. To plan significant purchases for your businesses, you must cover these bases otherwise you will soon find yourself in the red. The key is to avoid a short-termist approach to business management. Always go for long-range planning to accurately project your future cash flows and plan you purchases accordingly.

Here is a look at some of the most common cash flow problems that your Australian business is likely to face:-

Seasonal Income

This is a cash flow problem that may be out of your control. If you are running a business that experiences periods of heightened seasonal activity and long periods of downtimes, you are most likely going to run out of funds during the low seasons unless you carefully manage your expenses to cater for the seasonal fluctuations in demand. Some businesses in this niche usually use invoice finance that gives them the cash to fulfill orders when the peak season hits.

Customers taking too long to pay

Late payment is a feature of the Australian small and corporate business scene. In fact a study has ranked Australia as the “worst” country in the developed world when it comes to the late payment of the bills. It takes on average 26.4 days to pay overdue invoices in Australia. In some business sectors, this statistic is even worse with businesses spending months chasing debtors. If this is the business terrain in which you will be running a small business, it is certain that you are going to grapple with some cash flow issues.

When running a business, you are most likely going to deal with a slow paying and a late paying customer. A late paying customer is usually the business owner’s worst nightmare. For the health of your business cash flow, you are better off dealing with the slow paying client. They will ensure you have the constant cash flow required to keep your business afloat. You can also take measures in order to cultivate stronger business relationships with them, such as by offering trade credit. However, too many slow paying customers may also hurt your cash flow. Always try to strike a delicate balance between the various types of customers that you have to rely on to move your merchandise.

Rapid business expansion

Some small businesses will simply hit the sweet spot and take off right from the launch, acquiring new leads and experiencing booming sales. At face value, there isn’t really anything wrong with rapid expansion. Businesses want to spread their tentacles as far as possible, ramp up their sales and gain the market edge.

However, a fast expansion can also spell doom for your business if not well managed. Oftentimes, you will be stretching yourself too thin. The main issue will be the overhead costs which may pile up too quickly and drain your cash supply before you are able to recoup them through increased sales. This may in turn force the business to reject orders unless it is able to get some quick cash injection from outside the business.

This is where business forecasting and cash flow projections will come in handy as they allow you to accurately plan future purchases and other expenses associated with rapid business expansion based on the current growth rate. Without projections, you could be immersing yourself in a very risky rollercoaster ride.

Lending Restrictions

Most businesses will need a constant injection of cash into the business in order to support growth and keep operations running. However, securing cash injection has always been an uphill task for many small businesses, more so in the post financial crisis world where lenders are more cautious and stringent in their requirements.

Before the crisis, lenders could approve loans that were just “good enough”. But the age of financial speculation is long gone and lenders will only approve loans that are “perfect”. This has radically limited the financing options for small businesses, many of which now have to bootstrap and adopt lean operating models to succeed. The problem with running a business on a very “thin” cash flow is that even the slightest calamity could be catastrophic.

Failing to do customer credit checks

Businesses, especially startups, may be so eager to generate leads and cash flow that they overlook some basic business operations such as doing a quick background check on customers. If some of your leading customers are facing business challenges and are at risk of going bankrupt, you must carefully evaluate the effect this is going to have on your business cash flow. It is safer to build solid business relationships with customers that have a healthy balance sheet.

If a customer has a poor credit history, set reasonable limits on the amount of business that you can do with them in order to minimize your business exposure and potential financial shock should the customer go bankrupt. While saying no to new business may seem unwise, sometimes it may be key to your survival.

Simple Tips to Help You Avoid Cash Flow Issues

  • Forecast your cash flow: – Set financial targets for the next 6 to 12 months that tracks your finances and ensures you avoid any future shortfalls.
  • Stay on top of your payments: If you are running a small business, you cannot afford to have too many unpaid bills. Dispatch invoices and follow up to ensure they are paid on time. Invest in good invoicing software to help you stay on top of your invoices.
  • Be on good terms with your lenders: – As a small business owner, you are often going to need your lenders to pull the lever for you to help you keep the business running. Build a solid relationship with your lender that is based on trust and transparency and they will be more likely be willing to treat your business on more favorable terms.
  • Access credit: Sometimes, even with the best forecasting and prudent management, a business may still run into a wall or see some unprecedented growth. Don’t be afraid to take credit, especially if your business is growing rapidly and you need to refill your arsenal in order to fulfill your orders.
  • Watch on the outgoings: It is good business practice to pay your suppliers promptly but what if this may be causing you cash flow issues? Watch out on the frequency with which you pay your suppliers and if it is negatively impacting your balance sheet, you may decide to slow down a bit or even pay by installments.
  • Adopt efficient stock management:- Efficient stock management should go in tandem with efficient cash flow management because these two are intricately linked. Get one wrong and it is going to have an impact on the other. When reconciling your bank account, don’t forget to reconcile your stock records.

When it comes to small business management, you have to stay on your toes. Watch closely on the foregoing and anticipate any future business challenges that might erode your cash flow. It is also good business practice to hire a dedicated accountant Melbourne professional who can watch over your books and raise the alarm when things are heading south.

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