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When the cash’s not flowing right

A few months ago, I read a number of comments on a particular LinkedIn post with great interest. The original poster was making the point that other companies were only getting paid about 50% of what they were due on the date that it was due. The collective LinkedIn audience gasped and booed at such disgraceful treatment of the SMEs (let’s call them David Ltd) by their corporate clients (henceforth known as Goliath Ltd). They immediately called for action!

“Goliath Ltd should make payment upfront” crowed one member of the LinkedIn audience.
“Impose high-interest penalties and enforce them!” yelled another.
“Don’t offer 20th of the month terms in the first place” boomed a third.



At this moment I half expected the next comment to be from Marie Antoinette who would no doubt scream “Let them eat cake!” Do I sound cynical? Good, it was intentional.



Resolving cash flow issues

The three responses I’ve highlighted above (there were many others, none bad, some actually very good) are classic Finance 101 university exam answers to a question that simply says “David Ltd has a number of customers. Its biggest is Goliath Ltd who always pays, but never on time. This causes strain to David Ltd’s owner and subsequent cash flow problems, leaving him awake all night worrying about whether he has enough in the company bank account to pay his hard-working staff in the morning. What would you advise David Ltd do to resolve this situation?”

The answers above could all be considered correct because a university exam is simply asking you to provide the theoretical answer.  When we step into the real world, you’re going to need to take that book of theory and consider selling it to help with your cash flow problems so you can fund the shortfall created by Goliath Ltd’s tardy payments!

Most cash flowing from one business

In the real world, Goliath Ltd runs the show.  They possibly provide David Ltd with a large percentage of its income (this is called Concentration Risk and something I’d like to talk more about another time) and rocking the boat by complaining about their payment cycles might create bigger problems for David Ltd than they actually solve. Especially if Goliath Ltd can replace David Ltd with … Also David Ltd!



Cash flow picture for NZ SMEs

Is the above situation familiar to you and your business so far? Chances are it more likely is than it isn’t. In fact, according to the Xero Small Business Insights team (you’re going to want to be sitting down for this):

  • Only 44.9% of all businesses on Xero were cash flow positive in May 2019. That’s lower than the average month … but even the average is only 50.54% over the last year. Think about that fact. HALF of NZ businesses that use Xero have cash flow problems; they are spending more than they are receiving each month.
  • January is the worst month with 39% being cash flow positive in 2019 and 38% in 2018. Sounds like Kiwis are putting Beaches, Baches and BBQs ahead of Business, Bank Balances and … OK I’m out of B words now.
  • The number of days after an invoice’s due date that it was actually paid has averaged 8.8 days every month over the last year.  How would you like the payment of your wages or salary to be delayed by more than a week? I certainly wouldn’t.

I find some of these statistics disappointing and I do lay a significant portion of the blame at the feet of those companies that are more Goliath Ltd than David Ltd.



Cash flow solutions

Let’s focus on solutions not cash flow problems though.  That’s what I always tell my children when they give me a list of reasons why they couldn’t possibly clean their rooms every … single … week.

What do delays in payment mean for your business? Does it really create that many cash flow problems? You may sit there thinking “8.8 days late? That’s annoying, but it’s not the end of the world”.  I can understand how you arrive at that view. But remember, that’s 8.8 days every month.  So if we extrapolate that out over the course of a year it translates into:



  • Nearly 106 days; or
  • A touch over 15 weeks; or
  • Over 3 ¾ months.

Covering a cash shortfall

Seems a bit more than annoying now doesn’t it?  All that time that David Ltd hasn’t been paid, they’re having to fund that shortfall themselves which comes at additional cost. Be it through a bank overdraft, or additional funds being injected into the business by the owner or some other method, the slack actions of David Ltd’s customer is putting unnecessary financial and mental strain and additional cost on David Ltd. And let’s remember that this is happening to roughly 50% of David Ltds up and down New Zealand every month.

Solutions not problems, right?

So what is the solution?  Where is the stone and slingshot to be used that will immediately send Goliath Ltd crashing to the earth?  Well … there isn’t one.  Not one that’s going to lead to Goliath’s downfall anyway.  Which is a good thing because that would be bad for the business of David Ltd as well!  Let’s consider other options that might improve the situation for David Ltd:

  • Bank Overdraft: We all know what this is. The bank agrees to let you withdraw more than is in your account and they’ll charge you a rate of interest on the overdrawn balance. There’ll possibly be some setup and maintenance fees as well.
  • Invoice Financing:  Sometimes known as Debt Factoring.  This technique allows you to ‘sell’ your outstanding invoices to a third party and receive payment for them immediately.  The ‘catch’ is that you will receive a percentage of the value of the invoices – say 80% and the third party you sold them to will be paid 100% by your Debtor.  There’s a really great business in Australia called Timelio that is turning heads in the Invoice Financing world.  They’re like eBay for Invoice Finance.  Go and check them out!
  • Prompt Payment Discounts:  Does what it says on the tin.  Offer a customer a discount on the face value of the invoice you’ve sent them of X% if they make payment within a shorter time frame than you expect to be paid in.  Your profits will take a hit, but if you’ve structured your discounts correctly, the money you’ve forgone from an early payment can work out cheaper than the cost of your overdraft that is having to fund late payments.
  • Diversify your Customer Base:  Earlier I touched on Concentration Risk which exists when a business’ revenue and success is heavily linked to very few key customers.  By growing and diversifying your customer base, you are reducing your Concentration Risk whilst at the same time minimising the impact of late payments on your business.
  • Reduce Stock Levels:  If you’re not a service business, how frequently does your stock turn over?  If it’s in line with, or better than your industry norm, then great.  But could it be better?  If it’s worse than the industry norm, then it needs to be better.  All that stock sitting in your warehouse or shop that’s gathering dust is doing as much damage to your cash flow as Goliath Ltd.  Reduce the amount of stock you carry and watch your cash flow improve as a result!
  • Horses for Courses:  Just because Goliath Ltd expects David Ltd to fall in line with their Accounts Payable procedures, doesn’t mean that your smaller customers should pay on the 20th of the month following.  Consider different credit terms for different types and sizes of customers.  And obviously ensure that they’ve signed your Terms & Conditions which will clearly state what the payment terms are, as well as the consequences for not adhering to them.
  • Take a Deposit:  Take a deposit upfront.  Whether it’s refundable if something changes should be covered within your Terms & Conditions.
  • Ask for Payment:  Sounds obvious doesn’t it?  I’m not sure why we’re all to embarrassed to ask for payment.  Especially when it’s late.  There will be genuine times when a customer simply forgot to pay and a quick polite phone call requesting payment will very quickly resolve the situation. You’ve done the job/provided the service/provided the goods, you’re within your rights to ask for payment!

Cash flow forecasting

Of course, how you fund your business and its Working Capital requirements is just part of the puzzle. When you need to fund it is another part.  A good Cash Flow Forecast assists with that.  No, I’m not talking about the budget your Accountant did for you in April that is still sitting in an unopened email within your inbox.  I’m also not talking about the other email they sent you with an attachment titled “12 Month Cash Flow Forecast”.  I’m talking about a living, breathing, updated every week document that forecasts cash flow over the next 13 weeks.  It’s a tool that I consider vital in aiding a lot of key decision making. Perhaps we can discuss that next time.  Alternatively, get in touch now to discuss ways we can assist your business and the cash flow challenges you are facing.