Overcome cash flow horrors

How to


Is the amount of working capital tied up in your Debtor Ledger and Inventory crippling your business? Specialist broker Bob Berg, of consultancy service Berg Wholesale Factors, shares his thoughts on how to manage cashflow.


Are you a "money juggler" constantly spending valuable management time attending to business cash flow dilemmas rather than concentrating on your core role?
Adequate ongoing cash flow is more vital to business success than its best customers. Those in the fashion industry who encounter ongoing seasonal cash flow dramas are very likely doomed to failure unless remedial action is taken.
Customers want credit when they buy or a discount for paying cash; either way it's a cost and burden on the supplier since it is accepted practice that quality customers purchase only on credit and on their repayment terms, not the suppliers.
Opportunities to expand sales volumes, to take on new clients and markets, or buy out a bargain priced competitor are too often declined because of cash flow constraints.
One solution is converting all or part of the receivables ledger into cash. Turning business debtors into dollars is an increasingly common practice in today's economic climate. This trend is evidenced by the Australian Debtor Finance Industry growing from $15.1 billion in 2001/02 to $34.2 billion in 2004/05. Current indications are that the 2005/06 financial year will experience continued expansion of between 20 per cent and 30 per cent.

How it works
Basically, you deliver the product or service to customers, issue an invoice and receive between 75 per cent and 90 per cent of the value of the invoice within a couple of working days of the invoice and supporting documentation being received by the financier. The balance less a fee is paid to you after the invoice is paid by the customer. It could not be easier.

Who would decide to access money (their own cash) in such a manner, and why?
Consider those businesses who;
* Have desperately needed funds locked up in current unpaid invoices.
* Have monthly account sales of $25,000 upwards.
* Are growing their business.
* Wish to have the funds to buy in bulk.
* Have the opportunity to take advantage of C.O.D. discounts available from suppliers.
* Having difficulty meeting BAS and statutory payments.
* Lack the time or skill to credit check and manage their debtors.
* Have export market opportunities.
* Do not qualify for traditional lending due to a new or short trading history.
* Do not qualify for traditional lending due to a lack of "bricks & mortar" security.
* Have difficulty funding seasonal fluctuations.
* Are unable to pay creditors on time.
* Require off balance sheet finance (non-recourse)
There are numerous mainstream financiers and banks now offering such a service in various forms. In the case of fully disclosed factoring, the business outsources the accounts receivable accounting and collection function to the lender for all or some of its debtors. Alternatively, an invoice discounting service allows you to receive payment of invoices without advising customers of the existence of your funding arrangements. There are many products on offer that provide a range of features.

No two lenders having the same product, acceptance criteria, preferred client profile, debtor concentration issues, fee structure or level of service. This variation can be a minefield for the uninitiated. Your Bank, if you meet their stringent lending guidelines, may offer you its debtor lending product, but is it the best or only option for your unique needs?
Your accountant or financial advisor may not be fully conversant with all choices available to you. Therefore it is prudent business practice to seek independent advice from a professional who possesses detailed knowledge of cash flow and inventory finance alternatives.
Inventory finance is another funding option business owners could consider. A profitable business with over three years trading, with annual sales of over $3.5 million, may qualify for an inventory finance facility which can assist in the purchase imported and domestic stock. Inventory financiers usually offer a facility of amounts greater than $100,000.