BIZTALK: Don't let cash flow cripple your business
Naomi Simson joins Northern Star as a guest columnist for our latest series, Business Class.
THE way we did business, even a few short years ago, has shifted significantly. And while you may be serving more customers than ever before - and you may have better systems to support the growth of your business - understanding where the money tends to 'bottle-neck' in your business will help free the flow and make it easier for you to get on, and stay on, a path of growth.
I've often heard business owners lament they're "growing too fast" and are running out of cash. It's an often-quoted statistic that more than 60 per cent of small businesses fail within the first three years in Australia - and cash flow problems are the main cause for concern.
So while growing fast is a good problem to have, sinking too much money into working capital can ultimately limit your growth potential. Cash is always king, and having it in your bank account is better than having an overflowing debtors book, every day of the week.
I use one of my Shark Tank invested companies as an example. This business manufactures and assembles items in China, and imports the finished products into Australia (and the other countries where they have distributors).
They need to pay the manufacturer 50 per cent on order and 50 per cent when it leaves China. This process takes at least 60 days. The product is on the water for another 30 days, then must clear customs for dispatch to retailers.
The retailers - particularly the large ones - take the product and then do not pay until 90 days post-delivery. In total, the working capital of this business can be tied up for 180 days, or six months of the year.
To make a business model such as this financially viable, it is imperative to understand how much capital is held up at each stage, which becomes more complicated when you take into account concurrent orders and different countries and currencies. Then it becomes about reviewing payment terms, including:
- Which payments methods you accept - some cost more than others
- Whether you provide credit and the terms of that credit - this will generally be somewhere between zero and 30 days
- Your debt collection policies - the recovery of costs associated with getting (or not getting) paid.
The Business Council of Australia, supported by the Federal Government, has been pushing to get big businesses signed up to a payment code that would see them pay small businesses on time - that is, within 30 days or receiving product.
This is probably worth exploring more if you find that your terms are not being met. It is worth knowing what your critical number our debtors days is - and perhaps analysing them in terms of good payers.
Then it comes back to negotiation and renegotiation with retailers and manufacturers to get better terms. Or changing the business model. The business in question chose to change their model completely and moved to selling online and securing pre-purchases.
After analysing, they realised the cost of working with large retailers was not worth the wholesale discount - instead it represented an opportunity cost that took the funds they needed to focus on and deliver growth.
I have seen a number of businesses do this, because ultimately it is better to get the 'customer' to fund growth by taking deposits, pre-purchase or offering subscriptions. Each business is different, but it is worth taking the time and effort to look at it in detail if cash flow is becoming an issue. Every few months review where your cash is held to see if you can find a better way.
An entrepreneur and business leader; Naomi Simson co-founded the Big Red Group in 2017. BRG is all about serving experiences to different audiences through its various brands: RedBalloon, Adrenaline, Redii.com. BRG serves an experience every minute as the third largest experience marketplace of its type in the world. In this series we present some of her key learnings on how she grew her businesses.