Managing cashflow in 2012 a major business challenge: HLB Mann Judd Sydney

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Since the global financial crisis (GFC) we have seen three phases of business reaction to difficult trading conditions, but the current response could cause real problems for businesses, says HLB Mann Judd Sydney.

Since the global financial crisis (GFC) we have seen three phases of business reaction to difficult trading conditions, says Mr Simon James, corporate finance partner at HLB Mann Judd Sydney.

“The first two reactions were, in many ways, good for businesses but the current response could cause real problems for businesses.

“The first reaction to the GFC was to cut costs.  This was good for businesses as non-performing people, operations and sacred cows were removed, making businesses leaner.

“The second phase we have seen was a fight for revenue, where businesses became more innovative and looked to increase turnover and sales.

“At HLB Mann Judd Sydney, we noticed businesses putting a great deal of effort into maintaining revenues and building customer relationships.  Those businesses that worked in collaboration with customers or associated businesses were more likely to position themselves to compete strongly, not just immediately but in the longer term.”

Mr James added that what we are now seeing is the third iteration of the cycle is a drying up of funding availability to business, which is squeezing operations considerably – and some industries more than others.”

He said that maintaining cashflow despite the straitened economic background will be one of the biggest challenges facing business owners and managers this year.

“Due to the difficult economic environment, many businesses are changing the way they manage their own debtors – for instance, reducing or eliminating lines of credit.  This can have a dramatic effect for their customers, eliminating a source of funding and tightening up cashflow throughout the supply chain.

“In the ‘fight for revenue’ phase we observed businesses allowing greater periods of credit to customers in an effort to secure the sale.  This trend has now reversed and the timing of cash receipts is determining if sales are being made.

“Businesses whose suppliers once expected payment to be 45 day terms will find their own cashflow seriously affected if they now have to pay on 15 days, possibly requiring more business borrowing, which will increase operating costs.

“Such business must therefore take steps to ensure their own debtors pay promptly to help maintain a healthy cashflow.”

“If suppliers have tightened their terms of credit, businesses should consider doing the same to ensure consistency between what they pay out and what they bring in.

“It is vital that business have a disciplined credit control system and debtor follow-up.  For example, businesses that offer credit must manage this by setting terms of trade at the outset and sticking to them, reviewing outstanding payments regularly and following them up.  A tip for businesses is to put the Due Date in bold at the top of the invoice, rather than the invoice date.  We have seen this simple idea improve cash collections.

“Not collecting payment in a timely manner, and allowing debtors to increase, means the business is funding its own customers.  This is not a sustainable way to run a business, and will ultimately lead to losses,” Mr James said.

Finally, Mr James said business owners and managers should review borrowings regularly to ensure that they are still the most appropriate option for the business.

“Businesses continue to find it difficult to find financing from traditional sources such as banks.  However this doesn’t mean that they should simply accept the first opportunity that comes along.

“Some types of financing will be more suitable for the business than others. For example, if there is always a need for more finance on the same few days every month over and above levels required for the rest of the month, then look at financing methods that take this into account,” Mr James said.

HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and a member of the HLB Mann Judd Australasian Association.

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For more information please contact:

Simon James – Phone: 02 9020 4212

19 January 2012