ICAA Business in Focus Interview

Have you as a business, heeded the lessons of the Global Financial Crisis?

First lesson – The Fact that Cash is King
Examples

• With the significant number of USA importers defaulting on their payment terms, Australian importers found that this impacted imports from China, which became more cash on delivery driven than ever before.
• Getting buyers to stick to their set credit terms has proved harder to enforce therefore putting cash flow pressure on the Seller.
  Cash cycle between outflow for purchases & inflow for sales widened
• Cash settlement discounts demanded by large retailers grew significantly during the GFC period and reached between 5% and 7%.

Second lesson - The “tightness” of liquidity

No matter; how well a business is run, what the strength of security is or the strength & length of banking relationship, all banking clients have been subjected to high levels of scrutiny especially for those funding lines requiring renewal.

Obtaining additional sources of funding from traditional providers has been near impossible.

Third lesson - The sin of having all your funding eggs in one Bank basket.

And therefore the lesson “That its critical to diversify source of funding at all stages of the economy”

Prior to 2008 most businesses fell into the old banking trap of moving all their facilities under one roof – because of convenience, perceived relationships and so on. This has caused major problems for SME’s as their bank moved from being a willing funder to the reverse.

Businesses must set in concrete the fundamental rule to keep all funding as diversified as possible especially during the good times.

Have you planned access to additional source of funds?

This is a very lengthy process so prepare for it.

Prepare an Action Plan that will lead to a complete submission.
Plan should include as a minimum

• Ensuring all ATO repayment arrangements are complete before submissions to banks are made. Financiers do not look kindly on these type of arrangements as any default can lead to immediate winding up by the ATO. Remember the ATO is not a funder
• Ensuring all returns are up to date
• Year end financials are complete
• Management accounts for the past three months are readily available. This shows the internal discipline that the business can produce these on demand.
• Accounts Payable and Receivable appear to be properly managed and collectible

Look at business financiers that don’t require property security to provide a facility. Always look at these on a cost benefit basis as opposed to simply the cheapest.

• Supply Chain Financiers generally base their lend on their assessment of the cash flow cycle of the transaction
• Business to Business Trade Card providers who provide funds on an unsecured basis so long as its linked to purchasing or selling.

Reassess your process of funding receivables – Introduce systems and methods that ensure buyers do not have reasons to delay payment terms.

• Verify completeness of delivery soon after delivery
• Stratify receivables so as to concentrate collection activity on the those receivables that count – 80:20 rule
• Introduce a Business to Business credit card facility so that the credit risk of the buyer falls into the buyers financiers responsibility and the cost of funding the extended credit period is that of the buyer.
• Introduce Reward points to entice prompt payment.

Reassess your accounts payable process and options. There are a number of options available in the open market that allow businesses to improve cash flow by obtaining full 60 day credit terms whilst not impacting on the supplier.

Are your decision makers balancing growth with risk?

Over the past 18 months most businesses have been risk focused, internally focused and certainly local as opposed to global focused. Its critical that the business decision makers recognise this fact.

Decision makers need to balance this RISK FOCUS with GROWTH focus.

Will you be ready when your market moves?

And move it will – when you least expect it

Revisit you sourcing lines especially those from China. There has been a large amount of SME manufacturer failures in China over the past 18 months especially those in the export arena. In addition many Chinese exporters have refocused their sales towards the domestic China market. So its time critical that those pre GFC supply lines get re established or new ones get created and supply agreements drawn up.

Staffing – Most businesses have laid people off during the GFC. A process of hiring and training needs to be drawn up and implemented. And don’t forget your existing staff – most of them will now be doing their own research as to options in the market place and to lose them now having help you during the tough times is irreplaceable.

Are you focused on being "Fit & Ready" for growth?

Ensure that every thing internally works including things like making sure that all your new diversified funding arrangements have been repeatedly used even on a small scale just to safeguard that nothing unforeseen occurs and compromises your relationship with new suppliers.

Are you Resilient to withstand future uncertainties?

Don’t forget that just like the economists never picked the coming of the GFC nor can they now pick whether the recovery is V shaped or U shaped.