FINANCE, FACTORING, CASH FLOW Cash is King – How to boost the bottom line

Two years after start-up, now successful New Zealand export business hit rather significant wall: after period of rapid growth, an unforeseen provisional tax bill left the business with insufficient cash flow to pay staff. To make matters worse, the business had not proven itself to the extent that its bank was willing to bridge the gap. At that point, says one of business owners, all the shareholders lost it.
“We were all blaming each other and everyone was terrified of the effect on staff and the possibility of going under. We even shouted at our bank manager,” says the owner.
The business – which does not want to be named – was eventually saved by family loan but the lesson was learned. Today, it is thriving thanks to careful cash-flow pro-cesses, smart use of software tools, regular and close consultation with both the IRD and accountants, and good debtor management practices. It has also forgiven, but not forgotten, the wariness of its bank.
For variety of reasons, positive and negative, most businesses in New Zealand need ongoing and affordable credit facilities and, occasionally, cash injections. The challenge is to know what to borrow, when, from whom and through what finance scheme.
For larger organisations, an additional challenge exists around attracting finance professionals who know how to align business and finance strategies, avoid financial crises, and to plan and forecast future income and expenses against macro factors like possible economic downturn.
Not surprisingly, your average experienced chief financial officer is in demand, attracts large salary and may sit on the board. Seeking senior financial professionals through an executive recruitment agency specialising in finance staff is therefore wise.

Avoid the crisis
Before we look at proactive financial planning and financing for businesses, it’s important to look hard at reactive strategies and cash-flow management. Is it common for businesses to hit cash-flow crisis; what causes it? How can it be resolved so business can move from reactive financial position to proactive one that offers choices?
Hamish Edwards, CEO of Wellington-based accounting firm Edwards Accounting, says cash-flow problems are disturbingly common amongst small and medium sized businesses in New Zealand – he doesn’t know many businesses that haven’t faced one.
“Small businesses tend to grow fast and that growth soaks up working capital,” says Edwards.
He says the actual causes of cash-flow crises depend on number of factors including what the cash-flow cycle is (the day business has to pay its creditors compared with the day it makes profit), what customer orders have been placed, how many debtors exist, how fast the company is growing – and taxation.
“Too many businesses just don’t plan for their taxes and some don’t even know what taxes they have coming up,” says Edwards.
Yet, as any good accountant will testify, establishing cash-flow model can be as affordable as accounting consultancy fees and Microsoft Excel licence.
“Cash-flow management doesn’t have to be super-detailed, expensive or difficult, and yet it is essential. Businesses need to know their upcoming obligations, they need daily cash-flow model to help them forecast and plan, improve stock turnover, attract investors, save for tax,” Edwards notes.
He says businesses will do well to start with pessimistic cash flow.
“Halve your sales and see what it does. Make budget and stick to it. Don’t have an open budget to spend on anything and everything. Create culture of cost awareness so you are always aware of what you are spending your money on.”

Getting help
Banks are not the bad guys refusing to help businesses out of cash-flow hole, according to Greg Byrne, Auckland regional manager business banking for Westpac.
Byrne says when evaluating business funding, Westpac looks for business plan or strategy with substance, and at the existing cash cycles of the business, its suppliers, customers, longevity, and future industry prospects. It also looks at macro-economic issues – so if you’re going to have cash-flow crisis at some point, it’s better to have it happen in strong economy.
Businesses in cash-flow crisis often cannot show the bank workable business plan going forward, and many are not versed in formulating and writing business plans in the first place, says Byrne. However, others are well prepared and may have other forms of financial backing.
“Our advice is to ring-fence problem and analyse whether [a loan] would be throwing good money after bad. We have to look at how we are going to regularise the business for recovery and whether it will be good business going forward. If there is prudent risk, we will fund the business, but we will not just throw cash at problem,” says Byrne.
In his view, the importance of the relationship between business owners and their banking managers cannot be overstated.
“Without degree of relationship, it is hard for bank to take position on risk. Our absolute thrust for 2006 is to throw resources at business banking to ensure we understand customers and build relationships – small business banking is vitally important to bank,” says Byrne.

Investment finance
Happily, businesses don’t always need money because they’re in trouble – more often, it’s because they’re growing and cash flow can’t keep up. business in robust market position has quite few trading cards in terms of attracting finance and investors – and there is plenty of competition between finance companies and bankers for the right kind of business lending. So what are some of the options open to businesses looking for finance to grow, expand or diversify?
Ralph Shale, director for finance and investment firm i-grow, which specialises in raising finance and equity for companies, says it’s important to ensure any investments create return greater than the risk being taken.
“If you take equity, then you are selling part of the future growth potential and profit and equity investors often want to play role and have say,” says Shale.
While the debt to bank or finance company may be avoided (or lessened) through investors, some investors want to be involved with the business in way that the management of the business is not comfortable with, says Shale.
Once that risk has been considered and mitigated, businesses can start strategic planning to attract potential investors well in advance, he says.
“Work equity networks well in advance of when you need money – give it at least 12 months,” he advises.
Westpac’s Byrne says that thanks to the economy riding on tailwind for the past five years, equity investors have lot of opportunities so look for some form of differentiator in business.
“It’s that special idea, product or service,” notes Byrne. Shale says investors look hard at businesses with overseas channels where the currency is strong and interest rates are lower, and businesses should be looking in that direction too.
“New Zealand businesses rely too heavily on local distribution partners for growth. They need to look at vertical integration and international finance,” says Shale.

Operational finance
What happens if operational finance is more pressing than investment finance? In general, banks provide the cheapest operational business finance and take the least risk. Byrne says bank business finance products are relatively generic and one dimensional, and approval depends on the perceived risk by the bank and its appetite for new business.
Capital funding can be made available via overdraft or flexible credit lines, as can trade cycle funding around expected exports or imports, where finance is secured against the goods being exported or imported.
Beyond cash position, it may be possible for business to increase its operational finance through factoring – process that describes the forwarding of cash to business based on what the business is owed by its debtors. The factoring company charges comm

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