Cash & credit management: Going with the [cash] flow

Cash is the oxygen of business – vital for survival and growth, fatal if absent. So companies looking to survive and thrive in our post-GFC economy can’t afford to take casual approach to cash flow and credit management. Life has been tough for most businesses, and Craig Brown, senior lending manager, Lock Finance, says while lot of businesses used to make good money almost by default, today’s business owners and managers need better strategies and far greater understanding of cash flow and credit management. The good news is there are signs most are doing better at managing their cash flow cycle.
“It’s still not great, but it’s better than it used to be,” he says.
Traditionally, cash flow funding has been provided via overdraft facilities, term debt funding or leveraging against fixed assets. While banks still dominate commercial loans, there’s growing sense that these traditional products do not always meet the needs of the changing business environment. The stigma attached to factoring and invoice financing, once erroneously perceived as ‘last gasp’ options, is fading as companies realise the flexibility they offer.
“Internationally, invoice finance is very established method of funding business’ cash flow requirements,” says James Mitchell, head of business, Heartland. “New Zealand has significantly lagged behind this trend. Banks and business owners have all too often relied on securing company debt requirements against personal assets.
“However, this is changing as business owners seek to protect their personal assets. The demise of the finance company sector has also left partial void for fixed asset finance. Perhaps most tellingly though, traditional bank business lending products just aren’t suited in many cases for the environment we now find ourselves in.”
This need for flexibility in dynamic business environment is driving growth in factoring and invoice financing.
With full service factoring company hands over its debtors’ ledger to factoring company, which then provides line of credit equal to an agreed percentage of the ledger, normally 80 percent, and also carries out all the debtor collection activities.
Debtors know that the invoices have been factored, but Mitchell says many businesses do not want third party involved, perceiving this as interfering with their client relationships. For this reason he believes factoring is likely to remain niche product.
Craig Brown thinks full service factoring is generally more suited to smaller businesses, possibly new or undercapitalised. With credit management skills, resources and processes that “may not be that flash”, and with the owner too busy providing the product or service, lot of them will benefit from having third party handling the collection.
Invoice finance, whilst similar to factoring in many respects, is seen as having the advantage that debtors remain unaware of the discounter’s involvement and the client company retains full control over their debtors’ ledger.
BNZ is still the only New Zealand bank offering invoice financing. Andrew McKerrow, national manager cashflow solutions, sees invoice financing as positive force for business growth.
“It’s about enabling companies to grow, to springboard faster than traditional products, and invoice discounting works in good times and bad. We’re in tight business environment, but there are opportunities for companies to merge, or perhaps to buy out an owner who’s retiring. Baby boomers are setting themselves up for retirement and it is estimated 10,000 businesses will come up for sale in the next 10 years. When times are tough, or flat like they are now, we can still help.
“A board likes the fact we bring disciplines [to the process]… we de-risk their business. You can secure to certain level with an overdraft, but if you want to leverage for particular event you don’t always have tangible assets to that level of specific need. You need to offset the fees against the time value of the money.
“We will give 80 percent of the invoice the day the goods go out the door, and having the cash immediately may, for example, allow company to do another $1 million worth of business for $100,000 additional profit.”
Invoice finance is not for everyone. McKerrow says it is not suitable for highly contractual sales, or progress payments. There also minimum turnover of credit sales required, typically around $1 million.
“We’re flexible, but around $3 to $30 million turnover is where most of our customers are. We judge each case individually but the company must demonstrate good capabilities for credit handling. We can help where there’s lower equity but invoice financing is not for declining or unprofitable companies.”
Chris Reid of the Interface Financial Group (IFG) says his firm generally deals with smaller companies, in particular owner-operators whose turnover is nowhere near the thresholds of larger lenders.
“Our set-up is ideal for small businesses, as we advance on an invoice-by-invoice basis, so there’s no commitment past that invoice. It’s easier for companies to control costs, less stressful for them and they don’t need to wait until [the account] is past due.”
Rounding out the transaction will often be trade credit insurance policy. Chris Murphy, general manager of Trade Credit, says trade credit insurance is often used by factoring and trade credit companies to “seal the deal”.
“Over the last few years lot of the factoring companies have become more sophisticated. They’re not only looking at ways to get the deal over the line – if they see there’s risk they’ll often ask me to write policy to protect their client long term as opposed to simply getting deal over the line.”
While invoice financing helps the immediate cash flow, companies are still responsible for ensuring their clients pay their bills, and having sound credit management policies is absolutely vital.
Bruce Cross, CEO and operations director, Debtworks NZ, stresses that good credit policy starts well before an account becomes due. Sadly, resourcing credit management and providing more training often only starts to happen when sales fall away.
“The smart business makes sure everyone is involved in credit management including the sales force, which often sees credit as the ‘sales prevention department’,” he says.
Dave Allen, director, Vantage Consulting Group, urges businesses to carefully assess what debtors are costing them in interest, time chasing, management and bond enforcing costs – what losses have arisen where they haven’t been paid.
“Firstly, look at your current debtors’ position. How far are they overdue? What’s your mark-up? Do you have large numbers of customers [each generating] small dollars or fewer, larger customers? If 50 percent of your business is with single client you are very reliant on that one customer.
“Second, having the right processes is critical. Are contracts in place? What are the terms? What about retention of title where goods are old? Clear communication with your customer is vital, and you need to have process in the case of any dispute. full contract will clearly define payment terms, warranty provisions, agreements re ongoing service – everything that reduces the ability of your client to argue and delay payment. All this is Business 101.”
While outsourcing credit management can free up the business to focus on core functions, Peter Hattaway, of consultancy Hattaway & Associates, believes in-house credit management will always achieve the best results. However, one problem is that people tend to fall into the credit management role, and often it’s left to the receptionist or accounts staff.
There are currently two NZQA credit management qualifications – the National Certificate in Credit Administration (Credit Control) Level 3 and the National Certificate in Credit Management Level 4 – both of which can be undertaken online through training provider Rapid Results, but managing director Derek Good says gen