Even Australia’s most successful companies have their share of cash flow troubles, especially during growth phases.
Profits and cash flow are not the same thing. You can have a profitable business on paper and not have a dollar in the bank.
In some seasonal industries it’s almost the norm.
But a smooth and reliable level of working capital is essential to the success of any business.
Here are the five most common cash flow problems for Australian businesses.
1. Seasonal income
Businesses that raise most of their income in one part of the year have to carefully and diligently manage expenses, or they run out of funds to meet the sudden demand once a year.
Companies that make seasonal goods such as Christmas items, beachwear, or seasonal rural supplies are common examples.
Many turn to invoice finance, so they have the cash in hand to fulfill orders when the seasons change and their business picks up.
2. Slow-paying customers
It’s important to note there is a significant difference between slow-paying and late-paying business partners.
A late-paying customer simply cannot pay on time (or choose not to).
On the other hand, slow-paying clients can often be the safest debtors.
The problem is that many of the largest companies will only agree to invoice terms stretching out as far as 60 days.
Slow-but-reliable are often excellent clients, so you have to give them trade credit if you want to work with them, but their slow payments can hurt your cash flow.
3. Lending restrictions
While this has always been an issue for small businesses, it was recently made worse thanks to the global financial crises.
Banks have tightened lending criteria affecting many Australian SMEs and now continue to make it more difficult to obtain loans or raise credit limits.
Banks often look at your personal credit score and require collateral they can easily liquidate, such as your family home.
Some avoid certain industries altogether, particularly the temporary labour-hire sector.
4. Rapid expansion
Companies that are growing quickly incur the cost of increased overhead—materials, equipment, staff, expanded facilities, etc.—before they reap the rewards of their sales.
They drain their cash supply to meet orders then wait to receive payment while their bills stack up.
Without a cash flow injection, these companies may have to reject orders as they wait to get paid.
5. Lack of customer credit checks
Many Australian businesses experience cash flow problems because a major customer went bankrupt – leaving them exposed to bad debt.
Setting reasonable limits for companies with poor credit history can help avoid defaults and late payments.
It’s tough to turn down business, but doing so could one day save your company from going broke.