Cash For SMEs is Tightening – Will Your Business Get The Funding It Needs?

In all our turnaround assignments at Vantage Performance, the mantra is “CASH IS KING”.

Why? If money is not being placed into your bank account to pay for your purchases and operating expenses, you will not have a business. We use credit from financiers to balance the inflows and outflows.

So let’s talk about financing the outflows:

  • Creditors are becoming fed up being used as a bank and as interest rates increase, pressure will increase on their collectors, and in turn you, to keep within the agreed payment terms.
  • What about the Tax Man? When the GFC hit, governments around the world reduced interest rates and provided payment holidays for their citizens. Australia was no exception. But times change and we have noticed that our tax man is being less agreeable than he was six months ago. He has been putting into place various legislation to catch phoenix operators and been tightening up the law around Directors Penalty Notice (DPN).
  • What about family and friends? If you borrow from them, you put the relationship at risk. The test is, will they give it to you rather than lend it and if the answer is yes, go ahead and get the gift.

Then there are financiers, including the banks. What do professional lenders want if they are to lend you money? They will all have their own requirements   included in the fine print. The following will give you a guide as to what you will need to understand to keep your banker happy.

Cash flow generation and distribution

What should you include in your calculation of your cashflow available to fund current operations? I would mentally include purchases of stock/inventory, payment of expenses and collection of debtors. If those don’t provide a cash surplus, then you need to complete some cash flow projections.

Balancing use of cash

The purchase of long term assets such as vehicles, plant and equipment and land and buildings should be purchased with long term finance. An overdraft is not appropriate and neither are short term Bank Bill lines. If a business is generating cash in excess of what it needs to cover its trading, long term commitments and a return on invested capital then it may be able to use that excess cash flow to purchase long term assets. To keep your banker happy, the cash-flow projections must demonstrate that the cash will not be required for the period that the asset is being purchased.

A public company can issue shares to finance large long term projects. But if your business is like many small to medium Australian businesses, they have to rely on external financiers.

Action plan

It should not be left up to your financier to tell you what you can have for the matching of funding long term assets with long term finance and the balancing act of having short term finance to cover the growth of the business, increase in inventory and debtors.

Your financier is an expert in protecting his position – obtaining a return on the funds lent to your business – and he will let you know what you can borrow. However he is not the expert to tell you what you need now and in the future.

That is why you have to create budgets and cash flow projections to give you some idea of the future. It is not only an important exercise, it demonstrates to your financier that you know your business.  Talking to your banker in terms of your cash flow projections gives your application a boost up the ladder when they compare them to other applications.

Many businesses get their accountant to prepare cash flows to keep their bank happy or to support the application for additional borrowings. If you use these projections for only this you have missed the point.  Your projections are a working document and should indicate well prior to the event when a cash crisis is approaching.

We know that business people currently approaching their bankers for a temporary increase in funding are finding that their request is being passed on to the credit section of the bank and that section is undertaking a full review of the funding facility and requesting a lot of updated information including budgets and cash flow projections. This means delays and in the worst case scenarios the bank will say “no” and request you to reduce or repay the monies loaned by it. Therefore, you need to produce these projections in house or engage a consultant to prepare them with you.

The finance game has changed, as our banks now compete with other worldwide financiers for finance at higher interest rates. Therefore, in the next two to three years, we envisage all banks will be careful to allocate their resources to the clients who have a lower risk profile, understand their own business and can stand the higher interest charges that the GFC and government spending have caused.

Having a good understanding of your business and its cash flow projections will be crucial to securing funding.

Vantage Performance is a leader in sustainable business improvement, winning national recognition in 2008, 2009, 2010, 2011 and 2012.


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