How To Fund A Cash Flow Strong Business

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1 STRUCTURE YOUR LABOUR HIRE BUSINESS SO CASHFLOW IS NEVER A PROBLEM EDGEVIEW DIRECT 1

2 REVENUE IS VANITY MARGIN IS SANITY CASH IS KING! - KEITH C. MACDONALD EDGEVIEW DIRECT 2

3 It s often touted as common knowledge, and most business owners are fully aware that without cashflow, you re approx. 90 days away from disaster. No doubt you have also been told by those in the know, be careful not to grow too fast for fear of running out of cash. Sage like business advice is great, but practically implementing it is much harder and sometimes, it s just a matter of you don t know what you don t know. LABOUR HIRE BUSINESSES ARE A HIGH RISK OF FALLING VICTIM TO CASH FLOW PROBLEMS One thing is common, you are burdened with having to pay your staff weekly whether you re a labour hire business specialising in providing skilled labour for mining, building, manufacturing or traffic control service industries, or perhaps general unskilled labour. This would be fine if you were also paid by your customers on a weekly basis, but you are likely only paid by your debtors up to 60 days later. That means, for two months, or eight pay cycles you must fund the cost of your employees with the corresponding income they are generating, leading to a significant shortage in working capital. SO WHAT IS THE MAGIC RECIPE FOR SURVIVAL OF THE DREADED CASH FLOW SHORTAGE? The good news is you have five options at your disposal to create a cash flow strong business and, if implemented effectively can give you the edge over your competitors: Organic Cash Flow Competitive Terms of Trade, Prompt Invoicing & Early Settlement Discounts Putting the house of the line Overdrafts and Line of Credits Make your outstanding invoices work FOR you, not AGAINST you Debtor Insurance EDGEVIEW DIRECT 3

4 1. ORGANIC CASH FLOW This method is about structuring your terms of trade to meet your funding requirements. Successful implementation involves requiring your clients to make payment by either; full or partial payment upon order, cash on delivery (COD) or 7 day terms. A wholly focused funding strategy just using Organic Cash Flow, although cheap, has a potential and significant downside: competitors will likely be offering more favourable terms making you less competitive with the opportunity to secure new work and continue to grow being hampered. 2. COMPETITIVE TERMS OF TRADE, PROMPT INVOICING & EARLY SETTLEMENT DISCOUNTS Despite sporadic growth, remain competitive and boost cash flow at the same time: Focus on trade terms of 30 days from invoice date instead of 60 days. This will boost your cash flow especially where you are invoicing weekly. Invoicing promptly is key: Valuable cash flow is needlessly delayed by not sending your invoices quickly via . This way, invoices will be received and entered into your debtor s payment cycle quickly. Investing in an electronic time sheet system will reduce the lag between sign off and invoicing as well as human error on data entry. Early settlement discounts is the third component of this option: Your clients a discount of typically 2%-5% for early payment (within 7-14 days - be very clear to note on your invoice, the strict terms that trigger the discount). When implementing this component be sure to balance your costs. If you operate with tight margins, you can erode a significant portion of your profits when not carefully monitored. Be careful to keep a close eye on debtors taking these discounts and ensure payments don t extend beyond a few days otherwise you ll disrupt your cash flow. 3. PUTTING THE HOUSE ON THE LINE OVERDRAFTS OR LINE OF CREDITS Borrowing money via mortgaging a residential or commercial property has been the normal business practice for decades. Whilst such borrowing can appear to be cost effective, it has its disadvantages that you are probably all too familiar with. High growth businesses, particularly in labour hire, demand cash flow to be readily available. Apart from the lengthy application process, you will often require sufficient equity in your security property to meet your immediate and ongoing funding requirements. Another hurdle that you will likely face with this option are banking covenants, which, must be closely monitored, particularly if things aren t quite going to plan. Also, refinancing from a bank to get access to additional capital isn t something you want to do too often. Mortgage secured lending is a valid funding option, however not ideally suited where your requirements change often and you need the flexibility to move swiftly which can underpin the labour hire industry. In addition to this, 80% of Australia s SMEs are funded by a mortgage secured bank facility and, as baby boomer directors and/ or business partners look forward to retirement and succession planning, they will likely be taking their security with them. This will potentially complicate the lending mix of your business and possibly require a rethink to avoid a disruption to your cash flow in the future. EDGEVIEW DIRECT 4

5 4. MAKE YOUR OUTSTANDING INVOICES WORK FOR YOU, NOT AGAINST YOU Debtor Finance also known as factoring or invoice discounting allows you to use your outstanding invoices as the security, not your property and may just been the funding option you didn t know you were looking for. It is used extensively within Australia by astute business owners to bridge a cash flow gap, and continues to grow in popularity. Did you know according to Factors Chain International the global Debtor Finance industry funded 2.3 trillion euro in In Australia the average business using debtor finance has annual sales of $14m and a funding line of $2.2m. Debtor Finance works by receiving up to 85% of an unpaid invoice within 24hours, meaning that cash flow is available to leverage and sustain your growing business. The remaining 15% is paid once the debtor has paid the invoice, less a service fee. There is a negative view in the marketplace regarding Debtor Finance, largely centred on cost. Fees are based on the service provided and volume projected but typically cost between 0.8% - 2% per invoice. Let s put this cost in perspective. These costs are equal if not cheaper in cases, if you were to accept payments via credit card, rather than cash payments. PayPal for example charges from 1.1% up to 2.6% depending on monthly sales volumes. Even Early Settlements discounts as mentioned in point 2 normally begin at 2%. If you focus solely on cost, then sure it is potentially a more expensive option when comparing bank finance. What is often overlooked are the following benefits: Fast application process meaning much needed cash flow is available when you need it; Reduces your stress have the peace of mind knowing that your main asset, your employees will have their wages paid with ease. Not to mention tax and supplier expenses; No real estate security required personal assets do not need to be put at risk; Funding limits increase as your business grows cash flow is available when you need it, no need to keep applying for increases which also incur additional costs and delays; Increased work-life balance spend more time at home with the family instead of non-income generating administration work; Improved use of time have your financier systemise your credit control processes by issuing statements, handle debtor invoice queries, chase outstanding accounts and keep detailed accounts of all transactions so you can focus on running the business and generating sales; Gain a competitive advantage have the potential to win more business with the certainty that cash flow will be available when new opportunities arise. HOW IS IT SECURED This type of facility is secured by the businesses balance sheet and will truly allow your business to fund itself by growing in line with business sales. This means that as your business grows, your ongoing working capital requirements are covered. The downside is it may require a change in internal processes to manage the changed funding model, but the benefits over other options, particularly for a growing business are obvious. EDGEVIEW DIRECT 5

6 5. DEBTOR INSURANCE The finishing touch: Debtor Insurance protects your business from a debtor placed into administration or a protracted default. You will receive approx. 90% of what you re owed. If your client does not pay, you don t want your business and staff to be left at risk. Debtor Insurance is normally taken against non-blue-chip or Government debtors. Now you have the Ingredients, it s time for the Magic Recipe. Before locking down the best option, you first need accurate numbers and a clear understanding of the present situation with a perspective of future expectations taken into account. WORK OUT HOW MUCH YOU NEED. Unless you have deep pockets, you are going to need a reliable funding solution. But how do you determine what funding solution is best for your business? The answer, Cashflow Forecasting. A quick guide below will give you an overview of what we are referring to: On a piece of paper, write the date of your next pay cycle for your employees. Now write down every date from then on for the next three months. Take one of your contracts (if you have multiple) as an example. Under each of the relevant dates, in round numbers, write down in black pen under the corresponding date and amount you receive payment for that particular contract. (not to be confused with invoicing). Now in red pen, the amount of wages you must pay each wage cycle the corresponding dates. You will now start to see the time between cash going out and the time before cash comes in (black). If this was your only expense and income in the business, the funding limit you would require would be the total of the expenses in between income being received, less any spare cash you already had in the bank. The difference between the two totals will give you a general amount of funding required for the week. Now that you have a brief overview of how it works, you have also worked out it will take some time to do properly and best to have your accountant to set it up initially. If, after this exercise your bottom line figure dips into the negative then you have a cash flow problem. The size of the negative amount is the amount you need funding for, plus a little more for underestimations. EDGEVIEW DIRECT 6

7 WORK OUT HOW LONG YOU NEED ASSISTANCE A quick visual scan of your Cashflow Forecast will give you a snapshot of not only the amount but also the timeframe of which you will need the funding for remembering you are likely looking at the best long term funding option for your business. WHAT ARE YOUR IMMEDIATE BUSINESS PLANS Is your business growing or in consolidation? Are you expecting rollercoaster growth or a down turn in sales? Are you now looking for a method to bolster working capital? Are you planning for when you next decide to expand? Knowing your current and future growth plans ensures you can adjust your Cash flow Forecasting accordingly, clearly identifying future funding requirements and now that you are proactive with your funding you won t be caught off guard by not having the resources to capitalise on growth opportunities. You will likely discover Cashflow Forecasting is a great tool for your business. So which one is best You now know how much you ll need, for how long and what allowances and adjustments you need to make based on your overall business plan, the final part is selecting one or a number of funding options to best suit your business. Like many things in life, there is no one single best option to totally safeguard your business against a cash flow shortage. What is incredibly powerful in providing a strong and predictable cash flow position for your Labour Hire business is a combination of the options. We suggest implementing a strategy (not before completing an assessment of your funding needs described at the start) that incorporates options 2, 4 & 5 to build a robust and holistic solution that requires no personal injection of cash or assets. The major benefit is you can minimise personal risk whilst enjoying the rewards of a business that is truly self-funded. WHY EDGEVIEW DIRECT Labour Hire companies have a key focus in their business; consistent and reliable access to cash flow to retain quality staff and fund new opportunities. Edgeview Direct are Australia s specialists in helping Labour Hire companies fund their growth without mortgage security. We hold an Australian Credit Licence and are experienced in understanding the complex needs of business owners and leaders in managing cash flow, receivables and growth expectations. We understand what the lender will be looking for and ensure it is delivered. EDGEVIEWDIRECT.COM.AU EDGEVIEW DIRECT 7