Cashflow in the Quiet Months | BTalk Australia

Last Updated Feb 22, 2010 8:31 PM EST


Tim Lea (and his watch)

Tim Lea (and his watch)

(Episode 368; 12 minutes 59) Here in Australia over the summer months many people in business are on holidays. That means even if you're still hard at work those people who owe you money might not be. It's very likely that cash will be slower coming in through the door.

Tim Lea, a partner in Cash Stream Financial, says many businesses do not realise how deep the problem can be.

So how should you be planning to protect your business over the quiet months? Will the situation be worse this year because of the global financial crisis? What should you do if you fear cash is going to be short? What is factoring? Is it an option for bringing cash forward?

Today's BTalk Australia is essential listening, particular for small business owners.

Share your own observations, experience and advice. Leave comments in the Talkback section at the end of this post.

Subscribe to BTalk Australia on iTunes.

View all BTalk Australia podcasts here.

  • Transcript
Phil Dobbie: Hello I'm Phil Dobbie, welcome to BTalk Australia. Today, getting through those quiet months for business and still having enough cash to keep your head above water.
Well my email inbox is already starting to fill up with the Christmas Party invitations, so don't I feel popular all of a sudden? But it's a scary reminder, of course, that the holiday season is almost upon us. And for a lot of businesses that means less sales and less money in through the door. And here in Australia the holiday period stretches on for some considerable time. So how do you manage cashflow during this quiet period? Tim Lea is a partner in Cash Stream Financial, which is an advisory firm based here in Sidney. So Tim, do you think a lot of small businesses go into this period without thinking about the cashflow implications?

Tim Lea: I think they have a general idea that there are issues that they've got to face. Just recognising they got to pay holiday pay and that type of thing, and that they know that they're going to be closed. But they don't really think through, often, the implications that it may have on their customers. Because with the silly season that comes through you've got two weak months, which make it very, very difficult. And a lot of people are away on holiday. And you get situations where bills just don't get paid in between sort of the 15th of December and the 15th of February. Typically, cash just dries up within the whole economy and it's in a vicious circle. So a lot of people don't really recognise how deep it can get and the problems it can cause.

Dobbie: Yeah, and I guess the issue is that you can't beat it, can you really? I mean a lot of people won't be paying, because they haven't been paid themselves, or as you say they're not there.
Lea: That's exactly right. Last year, well sort of in the early part of this year in January we had a client within the engineering sector that actually approached us in about sort of mid to late January. We got an email on a Wednesday night, and they needed to pay the wages on Friday. And because they're involved in civil engineering if they didn't pay the guys on site they'd all walk off. And at worse they might even smash the site up as I've seen happen in the UK during the recession last time. But the issue was that the particular client was in a situation where the CFO, the finance director of the main contract that he was working for was on two weeks leave.

So the situation was a big payment he was expecting did not come in. So he was left high and dry panicking about paying his wages. In that situation we did manage to get him sorted out with some short-term finance against some invoices. But it was very expensive, and it would, you know, if he had come through to us back in December we could have got a far more cost effective solution sorted out for him. But it was just one of those situations, he was in panic mode. And he just couldn't pay his bills. He couldn't pay his staff.

Dobbie: So the learning from that is you're going to start planning now, haven't you? You've got to figure out what money's coming in, who's going to be available to pay the bills. Even look at who's going to be on holiday from the people who are going to be handing you money.
Lea: That's exactly right. I would say that any business in general terms, if they're actually selling during this next 30 to 45 days, or sort of next 30-45 days, make sure you've got a very clear plan of action as to when you're going to get paid and how you're going to get paid, so you can plan. Because otherwise, you could be in the situation as being in the very uncomfortable position of having no cash during January and early February.

Dobbie: And I guess also keeping an eye on your own outgoings as well, delaying what you can for as long as you can.
Lea: That's the reality. I mean, unfortunately, this is what happens. And you find credit controllers are pulling their hair out around this time of the year trying to get the cash in. But it's like anything; it's he who shouts loudest gets paid first. And those who've got power within any business relationship are the ones that actually get their money. It's an uncomfortable time for a lot of people.

Dobbie: So I guess you should start shouting as well in that case, shouldn't you really? I mean you should be just sending out invoices. I guess from now you should really be saying from the end of November, hey when am I going to get paid for this?
Lea: Exactly. And if anybody has got any older debts that are actually outstanding, get them paid as much as you can before Christmas. Because every year seasonally for the last six years there have been the biggest number of failures, corporate failures, in March every year. And it's all linked in to this time of the year. So if you've got an old payer, put action in place right now; get that money in, because you may loose it.

Dobbie: Is it going to be worse this time around as well, because of what we've been through with the global financial crisis? I imagine it's going to be harder to borrow money to see your way through, for example, isn't it?
Lea: Well the global financial crisis has affected a number of different areas. Certainly lenders are much, much tighter with their cash. That they hold onto their cash. They're putting far more restrictive covenants as they're called --- the actual terms of lending. They're making it very hard. The credit guys are in charge. And it's the situation, because they're not lending money, what this means is that not only companies, but also customers and this type of thing are going to have their cash restricted.

Also, and this is one thing a lot of people don't recognise, the credit insurers have actually scaled back dramatically their involvement in the industries in general. Which means that the level of credit that companies, larger companies especially, can actually get; it's just not there. So liquidity within the whole market is very, very tight. And it's all happening because the global financial crisis. So it is making it very, very hard to raise money.

One of the key things is it's taking a long time as well. We've seen delays of probably going back 18 months ago you got a deal approved it may be four to five weeks. We're seeing that stretch out to seven to 10 weeks at the moment, because, yes, the global financial crisis has meant banks have gotten rid of 10 to 15 percent of their staff. Plus there's a big demand for cash. So it's causing real problems.

Dobbie: So you got to get in early, just because of the time it's going to take to process.
Lea: Absolutely. If people are planning their cashflow right now, if they want to get cash before Christmas they've really got to seriously start contemplating right now. Because I've seen it over the past seven years of being involved in the Aussie market that at Christmas time, especially the lawyers, they're all backed up with all of the deals trying to get sorted out. Not only finance, but other sort of corporate, and this can slow down the production of documents coming out to those that are looking to borrow money. So it's a situation of everything slows down. Once you get into the early part of December, forget it, nobody's actually going to get financed until the end of January at the very earliest. So very much plan for it now and actually instigate any applications now would be my advice.

Dobbie: Now if you have got the ability to show, because you've planned far enough in advance that the shortage of cash is only a short-term thing. You've got invoices out there unpaid, it's also a couple of slow months, but the business traditionally bounces back in late February and March. Does that mean you are going to be able to get access to that finance, so long as you plan in advance?
Lea: Providing you plan in advance, I mean if you've got a good relationship with your bank and you're coming to the now proactively to say, look I'm going to need to borrow an additional $50-$100,000. This is how I'm actually going to repay it. This is the situation. It's a short-term position, because... Then they're going to look at that far more favourably than going cap in hand at the end of January saying, oh I've got no cash. I need 50 grand tomorrow. It shows to be, to any person involved in banking and in the credit side that you're being proactive. It doesn't guarantee you the cash, but certainly what it means is that at least you're getting the opportunity to actually say, look this is what I actually need.

Most people understand that, most bankers understand that. And if they've got some discretion then realistically if you've got a good relationship with them and you've been proactive, what are they going to say? They're going to be sensible about it in most cases. If you're running short on security then the credit guys may be in control, and that's something that they may turn around and say no. But the key thing is, at least if you're approaching it now you can be in the situation, whereby if you get a quick no from them, then at least you can explore other options.

Dobbie: Now finally, just explain this concept of factoring to me. This is where you're basically getting a third party to collect the money on your behalf so you get paid quicker?
Lea: The third party gets involved in parts of the collection process. The key thing is essentially that there's cash available. Now if you take a random example, say a company's got half a million dollars worth of invoices outstanding. On day one of a factoring facility they can inject into the business a balance of probably somewhere between $400 and $450,000 into the cashflow immediately. And then on a go forward situation as soon as a client or a business raises an invoice they can get up to 90 percent against the value of the invoice upfront, with the remaining portion we pay to them when the customer pays. So the idea is instead of actually having to wait until customers actually pay, cash can be made available upfront. It's really a financial facility more than the necessarily the collections process. But certain factoring companies do get involved in the collections process as well.

Dobbie: So there are many businesses doing that? And can you do it just for part of the year? Can you say, well look, this is going to get me over the next few months, but really I don't need to operate this way all year round.
Lea: There are also options available in the marketplace. In general terms most factoring companies will like to see a facility for 12 months. There are some that will consider a shorter term facility, providing, to be honest, they can make money out of it. But in general terms there are smaller factoring companies that can, for example, look at even individual invoices. But those, they can be quite expensive; in terms if you need that flexibility they can be very expensive.

Dobbie: The pay off, of course, is that you're not getting the full value of those invoices. Obviously you're losing some of the value. And I guess you've got to look closely haven't you? And say, well if it's really just to tide you over for those few months, and you've got those invoices outstanding, you have every reason to believe they're going to be paid, it's just that they might not be paid for a couple of months. That's probably an argument you should be having with your bank, first of all, isn't it?
Lea: I would say certainly. Approach your bank in the first instance. In general terms from a straight balance sheet perspective, they would value invoices at between 30 and 60 percent of their face value. But with the invoice discounts and factors they'll look it up to 90 percent against the value of an invoice. Don't forget the residual balance gets paid to the actual company that's factoring, once the money actually comes in from the customer. So it's only the charges that any business who factors, which factors would actually loose.

Dobbie: Right.
Lea: But certainly speak with a bank first of all. See if they can actually provide that additional level of cash. And then if they can't, then that's the time to explore other options. But again, don't leave it too late would be my overriding advice.

Dobbie: Yeah, absolutely. I mean it's a dangerous time of the year, isn't it? The message very clearly is if you don't plan there is a danger that over the next few months that you might actually go to the wall.
Lea: It is one of the key things. You might well be talking to a liquidator as a creditor at one of your customers meeting; the one that's actually gone bust. But as you say, at worse, it could be the situation you're talking to a liquidator at your own.

Dobbie: Now on a lighter note it seems every single finance site has got to have a few one liners thrown into it. It must be a sign of the times. We've all decided we're going to populate our website full of jokes. And I've noticed you've got some. Yours is no exception. You've got some in your blog. I like, what is the difference between an investment banker and a large pizza? The pizza can still feed a family of four. I like that one. Tim Lea, thank you very much for your time today.
Lea: Thanks Phil. Bye.