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10 Cash Flow Issues Small Businesses Face and How To Solve Them!

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How to solve cashflow problems

Running a small business in Australia is not for the faint of heart. It's a journey with ups and downs, with cashflow management being a major problem for businesses.

At Royce Stone Capital, we’ve had the privilege of helping many businesses get past these hurdles! As business lenders, business advisers and deal makers for businesses doing up to $100M in revenue, we know what it takes to get ahead!

For this reason, we’ve listed 10 common cash flow problems that businesses face and how you can overcome them!

1. Customer late payments

On average Australian businesses are paid 23 days after their due date, costing businesses billions of dollars and losses in terms of opportunity cost (how else that money could been have been put to use). Every business suffers from this, including us! Whether the amount owed is $100 or $1M, there is toll in terms of time, opportunity cost, and mental bandwidth!

What can you do?

Clear payment terms

Establish clear payment terms upfront and ensure you're invoicing promptly. An automated invoicing system will remind late payers, so you don't have to chase them.

Have the right legal agreements!

Do you have your terms, conditions and penalties signed off in a services agreement? If not, why not? Speak to your lawyer and make sure your clients sign your agreements.

Create financial incentives

You can incentivise clients by offering them a discount if they pay invoices within a certain time period of the invoice being issued!

What finance solutions can help you?

If cashflow is tight because payments are taking a long time, and or because the debtor has extensive payment terms with you, invoice financing may be the ideal solution for you.

2. Seasonal Revenue Variations

Most companies go through seasonal peaks and troughs and in certain industries such as farming it is even worse. Think of retail, December is flush, but January can be downright eerie. Seasonal dips in revenue can have you scrambling to cover mundane expenses. The problem is, revenue might take a hit but business expenses don’t!

What can you do?

Cash buffer

It's crucial to build up a cash buffer when you're at your busiest. Some of our clients hold 25% their yearly revenue as a cash buffer to help them balance out their financials for quiet times.

Diversify products

Diversifying your products or services can also smooth things out. For example, could you add something to your portfolio that is of interest to clients that could help cover base expenses?

Forecast properly

If forecasting feels daunting, engage a bookkeeper or virtual CFO to help you plan ahead. The better prepared you are, the less surprises you’ll face!

Have a credit facility set up

You can set up credit facility against existing assets to help during the quieter months. We've helped several clients secure private loans to use on a as needed basis, for when revenues take a dip or when they need access to funds.

3. Unanticipated Costs

Every businessperson knows the feeling when a piece of equipment breaks, or an unexpected bill lands on your desk! These unexpected expenses can wreak havoc on your cash flow in no time.

What can you do?

Mentally prepare for the unexpected

Appreciate that the unexpected will happen, and that it’s not a matter of if it will happen, but simply a matter of when! When you mentally prepare yourself for the unexpected, the unexpected no longer becomes as daunting.

Create a rainy day fund

Start by building a rainy-day fund. Even setting aside a small amount on a consistent basis can build a cushion over time!

Forecast financials

Additionally forecast that x percentage of plant, staff and equipment each year will go wrong, and build this into your expense profile for the year ahead.

Have the right insurance

You must also make sure your insurance coverage is valid for what you are doing. With the right policies you can be protected from the financial impact of emergencies.

Urgent business funding

If time is of the essence, private lending facilities or equipment finance can help bridge any gaps that you may have. Speak to us today if you need to know your options.

4. Over-Reliance on a Few Customers

As business advisers we’ve seen business with $50M plus revenues lose their entire business because they based their business model off supplying just a few key clients. Having one or two big customers isn’t smart business, its gambling at best!

What can you do? Diversify your client base!

Digital marketing to get more customers

If you’re not online, you simply don’t exist. You should have invested in a strong digital marketing presence and strong lead generation systems. Ideally your digital marketing agency, should have a large portion of their remuneration based off a success fee.

Educating future clients to generate leads

Educating audiences in your industry that will one day be your future clients is a great way to develop new business. Be known as an industry leader, giving the most value and the dollars will come in due course.

Public relations to grow your brand

If you’re the greatest thing in the market and no one knows about you, what point is it being the best? Invest in a PR specialist that understands your industry and that will help get you out there.

Referrals

Do you actively refer clients to others? Do they actively refer clients back to you? Do your current clients refer you to others?

5. Poor Inventory Management

One thing we typically see as business advisers is clients that have too much stock. They have capital / liquidity that is locked up in stock or equipment that isn’t being fully utilised!

What can you do?

FIFO

First in first out business principle, that is based on holding minimum stock levels, and only enough for 24 hours to 48 hours. Many large manufacturers use this, and as a small business you should be doing the same thing for what is realistic for your business. Idle stock, is dead money!

Sell Sell Sell

What’s the point of having surplus stock and making more of it, if you’re not selling it? Invest into marketing and sell your stock before making more of it.

Know your customer

If you have too much stock of a particular thing, does the market actually want that thing? Can you repurpose that item or use it in a different way?

Get finance against your stock if needed

Depending on the nature of the stock you have, you may be able to borrow against it to get access to urgent liquidity. At RSC we’ve made our mission to create bespoke loan products for businesses using alternative assets (eg heritage plates). Speak to us today if you need advice!

6. High Overhead Costs

Rent, utilities, and wages are necessities, but they will choke your business when they become too excessive or underutilised in comparison to revenue. As business advisers we’ve seen first hand how some business owners get stuck in their ways, instead of adapting to the reality at hand!

What can you do?

Adjusting staff levels

Instead of employing 100% of FTE, can you subcontract some of your staff? So as demand declines and increases, you can adjust your labour costs?

Better supplier terms

Can you negotiate key terms with suppliers to give you more breathing room? This may be as simple as asking for 90 day payment terms, or a line of credit.

Energy and space

As business advisers we’ve seen firsthand clients that have spent obscene amounts of money on fit outs that were underutilised! Ensure you have the right space for your business!

Short term funding

Where there is a mismatch between incoming revenue and outgoing expenses, consider invoice finance as a solution or a supply chain cashflow solution to help fill the gaps.

7. Inefficient Billing Processes

Late invoices being paid leads to your late payments of other expenses you may have. Money is the blood of your business and without it your business can’t survive.

What can you do?

Establish a proper treasury function in your business

Does your business have a property treasury function to manage cash flows? As business advisers, we’ve seen firsthand business owners that have no idea of how much cash they have in their bank account, yet alone the management of inflows and outflows of cash! Make sure you stay on top of cashflow by establishing a proper treasury function.

Having a proper invoice system

Do you have the right process and systems in place between work being completed by the operational arm, and clients being invoiced correctly? Do you have the software and processes in place to ensure accuracy?

Bad debts process

Do you have a process for chasing bad debts? Do your lawyers have the right legal artefacts on hand and agreements, to chase bad debts for you, so you don’t need to stress about it? Having a process for this, will greatly get rid of the stress of managing this process, so you can focus on other things.

Offer multiple payment methods for invoices

Offering multiple methods of payment—such as credit cards, bank transfers, or PayPal—makes it easier for clients to pay on time. The simpler you make it, the better.

8. Rapidly growing businesses

If there is one thing that rapidly growing businesses have in common with businesses that are financially in trouble. It is that they both have a liquidity issue! Rapid growth without the necessary cash flow to support it, is just as bad as a business without sales.

What can you do?

Plan for growth

Growth needs to be carefully planned and paced. Use cash flow projections to determine what you'll need and when. Expanding step by step can keep you from over-extending yourself and worse yet, save you from having a liquidity problem.

Plan for your growths financial needs

As business advisers we’ve seen rapidly growing businesses collapse just as quickly as they’ve started, because they didn’t plan their capital requirements properly.

Do you need to raise equity? At what valuations, and at what stages (read more about our corporate advisory here). Do you need a private loan? 2nd mortgage? Invoice financing? Supply chain finance. If so when will you use them and under what scenarios?

Do you need private corporate debt or a bank facility? When will the business be bankable? How much can you afford to pay for debt? Is there enough margin in what you’re selling to pay for the financing costs? These are all things you need to plan for ahead of time.

Staff resources

Do you have the right staff in the right positions? We’ve seen businesses that have employed 50 people, when they only needed to employ 20. Worse yet we’ve seen directors appoint other key personnel because they were family, and not because they were competent. You need to make sure you have the right number of people, doing the right things!

9. Debt Mismanagement

Getting into debt is not necessarily a bad thing, providing it used for income generating activities, with a higher return than the cost! But if not properly managed, it turns into a liability that drains your cash flow.

What can you do?

A home loan and lifestyle is not a business asset

Just because your business can borrow x amount of dollars, isn’t reason for you to buy an expensive home or spend money on a luxury lifestyle, that does not produce income. Treat your businesses money as its money, and your money as yours. The two have to stay separate!

Refinance where possible high-cost debt

Refinance high-interest loans where possible to reduce your repayments. All too often we’ve seen business owners take on the wrong debt facilities because they needed money quickly. When in reality had they let us advise them, we would have sourced them cheaper capital and on better terms.

Look at alternatives

Do you need other sources of capital? Do you even know what you have available to you? This is why having us as business advisers is so powerful, because we know things that you aren’t aware of. From government grants to heritage plate lending, to private loans, supply chain finance, private corporate debt and invoice financing, we are across it.

Layer debt the right way

If you don’t layer your debt correctly, you could end up blocking potential sources of capital. For example banks are notorious for taking as much security as they can and giving as little money as possible. When in fact they may not be entitled to the entire security pool, locking you out of equity you are entitled to. To learn about how to structure debt properly watch this video here.

10. Focus on income generating activities

If there is one issue that leads to business owners having cashflow problems, it is because they aren’t focused on income generating activities. Activities that generate revenue for the business!

What to do?

What makes money

As a business owner you represent your business and as such you are its head salesperson! Your time must be spent on activities that constantly generate revenue!

Key activities include time spent on marketing, networking, sales and developing your future pipeline! All too often we have seen business owners get caught up in delivering the service / product, when this process should be done by another party or have been automated.

Ask your self each moment of each day, is this activity making me money?

Getting lean

Focus on increasing your gross margin and getting rid of the unnecessary costs in your production process, or by getting better value from inputs into the production process.

Final thoughts on solving cash flow problems

Cash flow problems are a fact of business life, but they don't have to hold you back. With the right solutions in place, you can overcome them and keep on going. At Royce Stone Capital, we're dedicated to helping you every step of the way.

To learn more about private loans click here.

To learn more about invoice financing click here.

To learn more about 2nd mortgages click here.

To learn more about our business advisory services click here.

For a private discussion click here.







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