Sunday 18th Nov, 2018

MONEY MATTERS: How to overcome the headache of slow payments

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THE operating environment for small and medium-sized enterprises (SMEs) in the transport and logistics industry is increasingly competitive and cutthroat, with only a small fraction of start-ups surviving their first two years.

For those that do, there is the constant threat of disruption by new cloud-based, blockchain and connected-platform technologies, employee and union pressure to increase wages and customer pressure to reduce prices.

But uneven cash flow remains one of the biggest headaches for transport and logistics operators. Sluggish cash flow caused by slow-paying customers is one of the biggest problems facing Australian businesses overall. While payment terms are usually 30 days, customers often take 60 days or more to pay.

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Much-needed cash is tied up in unpaid invoices, which can create problems in paying suppliers and taxes, lead to missed business opportunities and, in extreme cases, cause business failure. A lot of businesses find that financiers do not support them when they get into difficulty.

According to the latest Dun & Bradstreet research, only 68.8% of Australian business have their invoices paid on time by suppliers and customers. During the March quarter of 2018 the average late payment time for the Australian transportation industry was 10.6 days – a significant problem for operators with wages and other bills to pay. The problem worsens over Christmas and New Year when many suppliers shut down, delaying payments even longer.

New South Wales, Victorian and WA businesses across all industries experienced an average late payment time of 12 days with Queensland, South Australia and the Northern Territory averaging 11 days. Tasmania was the best performing state with an average late payment period of just 9 days – reflecting improved economic conditions.

Against this back-drop it is not surprising that business owners are looking at ways to reduce their cash flow challenges. Here are some of the mechanisms you can implement to reduce cash flow headaches.

  1. Do your credit checks
    Surprisingly, only a relatively small percentage of SMEs do credit checks on new customers. Given the increasing challenges of managing cash flow, this is an area in which many businesses need to improve. As a business owner, it is more important than ever to assess the credit risks associated with selling to a new customer before you close the sale. Financial prudence is fundamental to business survival in the current climate.
  2. More focus on cash flow forecasting
    A cash flow forecast can help make sure that you have cash available throughout the year or give you advance warning of a shortfall – which can help you negotiate an additional facility with a bank, or alternative source of funding, from a position of strength. It is important to be realistic and brutally honest with your assumptions.
  3. Check out alternative sources of funding
    Many business owners look beyond traditional sources of funding, with a significant proportion likely to seek credit from sources other than banks in the next 12 months.

It is an ongoing gripe of businesses that the security requirements for bank loans and overdrafts are excessive. Invoice financing is a viable alternative. By providing companies with upfront cash against receivables, invoice financing or factoring is a simple and effective service to smooth out cash flow troughs. The biggest benefits are fast approval and access to funds, lending up to 85% of the value of invoices, and the fact that property isn’t required as a security.

Interestingly, research shows that SMEs in other parts of the world, including Europe, are equally frustrated and as a result invoice financing has been one of the fastest growing financial products for businesses worldwide in recent years.

* Greg Charlwood is managing director of Australian Invoice Finance



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