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31 Aug 2016

How to improve business cash flow with debtor and trade finance


3 min

9 Steps that every business owner should apply.

In recent articles written for 'On The Pulse' we have outlined various forms of private funding. Today we will focus on debtor finance and trade finance.

Managing cash flow effectively is absolutely essential, and for many, the very key to business survival. Debtor finance and trade finance (which includes purchase order finance, export factoring finance and inventory finance) are often financing solutions that can assist in managing cash flow.

A large percentage of businesses that go out of business are still profitable; however, they run out of cash for critical payments.

Our financier contacts tell us that they are constantly asked whether debtor and trade finance can assist a company’s cash flow position. The short answer is yes. However, there are tried and tested principles that every business owner should apply to maximise their own cash flow. These are as follows:

    1. Set the trading terms for payment: ensure payment terms are clear and detailed on invoices and long term supply contracts. Obtain signed agreements that facilitate outstanding payments to be collected.

    2. Develop a process for clients to obtain credit: a documented process for handling clients obtaining credit, including the appropriate checks (e.g. Personal Property Securities Register (PPSR) and credit checks) will minimise business risk.

    3. Prepare a cash flow forecast: this should forecast across multiple scenarios and examines the minimum levels of cash flow required, including any periods of potential shortfalls. Monitor these forecasts with contingency plans and arrange funding in advance.

    4. Make payment easy: provide multiple payment options on invoices and the company website.

    5. Follow up late payments: clients must know credit terms are non-negotiable and must be adhered to in order to continue receiving product/service.

    6. Provide a discount for early payment: consider providing a five percent discount for early payment or full payment up front.

    7. Convert WIP (work in progress) quickly: turning over jobs will bring forward the payment timeline (e.g. 7-14 days' payment terms) and reduces the period that money is committed to i.e. cash flow held for expenses like wages and other overheads.

    8. Reduce inventory days: examine methods to reduce inventory days including sales and multiple sales channels or implementing a JIT (just in time) ordering system. Also, assess options like trade finance that is matched to the stock turnover cycle, which may provide cash flow relief.

    9.  Plan ahead for payments like GST, super, insurance, large business expenses: this prevents shortfalls and avoids last minute panic and stress that can impact on drawing down on other cash flow allocations.

If business owners follow the above steps and can still identify a need for debtor or trade finance, speak with a financier or financial consultant to assess if debtor and trade finance can help and is appropriate to your business model.

Should you, or your client require access to these private lenders, Worrells has invested significant time in identifying various funders that suit borrowers’ different needs. Please do not hesitate to call your local Worrells Partner.

General Disclaimer: This opinion piece briefly considers complex legal and financial issues. It is not a substitute for legal advice.

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