Australian Small to Medium businesses are facing a cash shortage, the likes of which we haven’t seen for many years. No business is immune, it’s affecting successful, profitable businesses across all industries nationwide.
Over the last month, this cash crisis has been heightened for those with a concentration of customers, or suppliers, in China. This has therefore turned cash concerns into a serious cash shortfall for a number of industries.
The problem however doesn't feel temporary. Tighter lending controls enforced upon banks following the Financial Services Royal Commission have made it harder for businesses to borrow money and making interest only payments toward a loan seems a thing of the past. Banks want to help, taking risks and lending money is one of the greatest contributions a bank can make to the economy and they have been doing that since the Medici bank began in the 13th century.
Now we have an environment whereby businesses are using each other as their bank. Larger companies are taking longer to pay their accounts, up to 120 days, while smaller businesses are struggling to meet commitments until well after the invoice is due or in some cases not at all. Furthermore, a fluctuating dollar and stricter terms of trade from overseas customers and suppliers has soaked up more working capital.
Declining sales and stagnant prices haven’t helped and interest rates next to zero say much about where the Reserve Bank sees us economically.
All of this has created the perfect storm for a cash crisis.
But what if your Sales and Profits are on the Up?
That's a good position to be in but growing sales, even profitable ones, can present challenges - firstly because you can have profit but no cash. Think of a business owner not having the available cash to pay their tax liability which was based on the profits they’ve earned! Not many businesses approach their bank for money because they are not making a profit. Even if the business owner gets what they need from the bank, the bank wants its temporary overdraft repaid on time, but growing sales generally means the business needs more money, not less.
So when the time comes to pay it back, the business cannot. It’s then the business owner’s knowledge of their own business is questioned as they’re unable to explain why they can't get the overdraft back to an agreed balance and in fact need more assistance than before. This situation can lead to a possible friction between the business and the people it owes money to, Suppliers and the Bank. Not to mention the stress it puts hard working business owners under.
What to do?
Control everything you possibly can. There are four places you can get money from; suppliers, net profit after tax (which is a limited source), putting in more money yourself (equity) or borrowing from the bank as we’ve discussed. If you can comfortably get your funding from one of the first three sources, you should, and you probably already are.
But the bank is generally the go-to, so make sure you have all of the required supporting information, know exactly how much you will need plus when and how you will pay it back.
Finally, if the plan has been completed by someone else, make sure you understand it as only you, the person running the business, can bring this plan to life. By doing this you won’t be one of Australia’s many businesses facing a cash shortage.
The missing link here is a plan and a course of action, something the business owner can discuss with the bank, or a potential investor and ultimately use as a management tool.
Through 35 years of experience in banking and a family business which spanned 40 years I have developed the Prime Profit System. A step by step online program designed to help you easily understand your finances and have available cash when you need it most.
I invite you to download one of my free reports - Don't Run Out of Cash and Get a Bank Loan Easily
I also invite you to join the Prime Profit System. I know it will be of benefit and will leave you feeling less stressed, more in control and you’ll have available cash when you need it most. - Find Out More