How to manage your cash flow

Most small and medium-sized enterprises (SMEs) are waiting months for payment and the situation is unlikely to improve over the next 12 months, warns Gary Green, national sales director at Bibby Financial Services.

Dun & Bradstreet's latest Trade Payments Analysis shows that businesses are waiting nearly eight weeks to be paid by customers, with the average invoice payment time taking 54 days. This has edged up from around 53 days in mid-2011 and compares to 14 or 30 days terms of trade.

"Added to this strain are concerns about Australia's economic growth and the federal election, which have caused many businesses to put on hold their employment and investment plans. That is putting upward pressure on the jobless rate," says Green.

"The current environment is very challenging for directors and management. Most businesses are surviving and not thriving."

Green says cash flow is key. "It is one of the main reasons for business under-performance and failure. It's vital for directors to be close to management on this issue given the personal liability issues around insolvencies. Our recent 'health barometer' found that 81 per cent of small businesses experienced cash flow over the past 12 months."

To pick up early warnings of cash flow stress, Green advises directors to ask these simple questions:

• Are our customers paying on time?
• Are our suppliers being paid on time?
• Is there enough free cash flow in the business to ensure our business strategies can be implemented?
• Do we have enough cash to meet our tax obligations?

Here are Green's top seven tips on how to better manage your cash flow:

• Future-proof your business. Ensure you have funding and cash flow certainty going forward through debt or other means.
• Always credit-check your customers and avoid clients with bad credit histories. 
• Stop supporting repeat offenders and clients who do not pay.
• Invoice often and as soon as you provide the goods or services. Don’t wait until the end of the month.
• Stay on top of your invoicing. Follow up. Send out statements regularly.
• Keep close to your customers. Get to know them and who needs to be prompted about payments.
• And, if all else fails, understand your rights as owners and directors. And, become au fait with the various means of debt recovery.

Meanwhile, as smaller businesses face increasing pressures in managing their cash flows, new research from East & Partners reveals that their relationships with their banks continues to deteriorate.

East & Partners' bi-monthly Business Banking Index (BBI) shows that businesses in the micro and SME segments continue to lower their assessments of their banking relationships across four key criteria: empathy, satisfaction, loyalty and advocacy.

In the research, conducted in July, the micro business segment BBI figure was 11.3 while that of the SME segment was 17 – both record lows.

Smaller businesses also report that dealing with their banks is becoming more difficult and this is reflected in decreasing demand for additional banking services. Contact with their banks is also infrequent. East & Partners head of markets analysis Lachlan Colquhoun says the new BBI research confirms the almost "two speed" nature of banking relationships.

"We continue to see a big gap between small and large businesses and the quality of their relationships with their banks," says Colquhoun, noting that smaller businesses are actively considering non-bank financing solutions as they show some signs of returning credit demand.