by Alexandra Caicedo

Small businesses make an important contribution to the Australian economy.  They account for the vast majority of the active private businesses in the country and represent a large share of employment and value added to everyday spending.

However, small businesses face many operational challenges and, as a consequence, typically have higher failure rates than larger businesses.

According to the Australian Small Business and Family Enterprise Ombudsman the survival of small businesses over a four-year period (2011 – 2015) was only 62%.

At the five-year mark, businesses have most likely had their share of wins and losses and, for many business owners, the fifth birthday can feel like entering a new era of challenges.

One of the most common reasons a business fails is due to poor cash flow. At the five-year mark, a business has probably seen significant growth.  Generally, growth is a positive thing, but too much growth in the early stages can be disastrous for a scaling business.

However, many businesses simply grow too fast in their early years and they do so without keeping an eye on the financial side of the business.  It is easy to take on more work, it can feel like the business is running at full capacity and on paper it might be.  However, if you spend all your time focussing on bringing in new work, it is very easy to lose oversight of the day to day management of aspects of the business such as paying suppliers, employees and getting cash in from customers.

Last year, the Australian Securities and Investments Commission released research indicating that nearly half of business insolvencies were related to cash-flow problems (i.e. inadequate cash flow or high cash use).

There are a number of ways to work through a cash-flow crisis, at the five-year mark and beyond.  

The following four recommendations may give you the best chance of remaining in control of your cash-flow.

  1. Expenditure needs to be under control

    This is number one because as a business owner, you can be strategic about controlling expenditure. To plan your expenditure, think about the timing of overhead expenses such as payroll and utilities and try to schedule invoice and bill payments in advance so you can space them out.  Also, familiarise yourself with every single expense so you can make educated projections about how much money you will need to have on hand at any given time.
  1. Debts and invoice payments need to be under control

    This is part of planning expenditure but with a specific and deliberate focus on being responsible with credit. 

    It is important, to keep up on top of payments to suppliers and creditors as if it is does not get done, creditors may take enforcement action that can ultimately lead to a winding up of the company.
  1. Bringing income into the business

    It is surprising how many businesses operate at a loss month after month.  Trading at a profit is a basic requirement that can be established by carefully identifying all overheads, the drivers and calculating pricing to cover them, leaving you with the required profit margin.

    It is important that the payment terms with customers match the ones you accept from suppliers so there is an even balance between money coming in and money going out.
  1. The need to be on top of credit control

    This tip is all about being realistic with how much credit you can offer customers and being proactive if credit terms are violated.  It may be awkward and unpleasant to confront customers (added to the potential loss of goodwill) if credit terms are breached, but it is all worth it if your business survives.

    In addition to the day-to-day credit control, it is recommended to avoid excessively generous credit terms as if there is not enough cash to pay suppliers it may cause serious financial strain in the business.

The above tips can help your business to prosper not only for the first five years but many years beyond that.  However, if you are in the midst of a cash flow crisis, the solution is simple, just get professional help in order to manage your business out of the crisis and take proactive steps to prevent a recurrence.



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