As published in CK Momentum Issue 10 (Click here to download)

Cash is the fuel that drives business, and many financial analysts consider the condition of a company’s cash flow to be one of the most important indicators of that business’s financial health.  The latest ASIC statistics show that in each of the last 2 financial years “inadequate cash flow or high cash use” was the top cause for the failure of companies. 

Unfortunately, companies facing cash flow crunches often simply throw money at the problem, which is a temporary solution at best. Cash flow management requires more than just a  financial fix. It requires a holistic approach that focuses on preventative measures to ensure against poor cash flow in the first place.

PREVENTION BETTER THAN THE CURE - AVOIDING THE CASH SQUEEZE

1. TIGHTEN UP YOUR TERMS & CONDITIONS
   Poorly drafted terms of trade create an environment open to abuse by poor payers. Well drafted terms and conditions incorporated into your customer agreements or terms of trade will increase your prospects of quick recovery and minimise disputes and recalcitrant payers.
   Consider using shortened or different payment terms for different types of work. 
• Thirty day payment terms for routine orders or services could be shortened to 7 or 14 days.
• As a minimum, the terms should contain clauses as to payment, default and termination.
• Think about offering early payment discounts as an incentive. 
2. GET PERSONAL GUARANTEES
   guarantees might not be needed in all circumstances but if you are supplying large numbers of high value orders to a corporate customer, a guarantee from the directors (or whoever holds the assets) is essential. Ensure that the guarantee is effective by including a clause charging the guarantor’s property. This is important if the aim is to secure the guarantee over property.
3. REGISTER YOUR INTEREST ON THE PPSR
   
   If you supply goods on credit, then it is probable that a security interest will exist capable of registration on the Personal Property Securities Register (“PPSR”).
   If so, it is vital to maintaining that interest that it is registered on the PPSR. PPSR registration may put you ahead of the queue in the event of a customer’s insolvency. If your interest is not registered, in the event of customer insolvency you will lose any proprietary interest in your goods and will rank with all unsecured creditors.
4. IMPLEMENT AND REVIEW A CLEAR & STRICT DEBT COLLECTION PROCEDURE
   It is essential that companies with a book of debts implement a clear debt collection procedure that is strictly followed. Your customers will soon learn that you need to be paid first.  
   Poor habits from you lead to poor payment habits from your customers. An effective debt collection process will maximise the chance of receiving payments from customers in a timely manner.
5. KNOW YOUR CUSTOMER & DO CREDIT CHECKS
   A key to good cash flow is information. 
   
   Perform credit checks on all new and non cash customers. This process can  immediately reduce bad debt, since you’ll stop offering credit to customers who haven’t proved they deserve it.
   Understanding whether the customer is a company, individual or trading  trust is essential to ensure the correct person has signed contracts and guarantees and so that debts can be collected. There are many free tools available to obtain information on  customers (ranging from Google and LinkedIn to ASIC and Court searches) all of which will assist in making informed decisions about customers. 
6. CONSIDER CREDIT INSURANCE
   Today’s business environment often mandates that small companies go global, but conducting business with trading partners overseas can be risky. Credit insurance can help mitigate those risks by protecting the value of your receivables.
   Credit insurance can be used on a case by case basis, for example, with new customers whose payment histories you’re unfamiliar with. Once you’ve established a more solid relationship with them, you can then stop charging them for credit insurance. 

WHAT CAN YOU DO TO OVERCOME A CASH FLOW SHORTAGE?

• INVOICE & INVENTORY FINANCIERS
  If goods or services are supplied on credit, then chances are the invoices can be “factored”.  The invoice financier could solve a cash flow problem by providing funding against your unpaid invoices.
• RENEGOTIATE YOUR TERMS OF TRADE
  Creditors are often receptive to flexible and lenient payment terms if you communicate with them early and effectively.  Identify creditors early and keep them informed of your intentions and your workout plan.
• GET SOME BREATHING SPACE
  
  Seek to negotiate payment terms and deadlines with your banks or other lenders and your landlord.
  
  

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