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The holiday season is looming large – and with it the parties, the networking opportunities, the tales of good cheer. Whilst the hangovers may be temporary, there is a more serious issue that all of us need to face - this is the worst time of the year for corporate cashflow.
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About the Author: Tim Lea is the co-author of the book "A Guide To Factoring and Invoice Discounting: The New Bankers."
He has spent 20 years within the Cash Flow Finance industry, as both a lender and a broker and is the Managing Partner of Cash Stream Financial, an independent commercial finance broker specilaising in Factoring, Invoice Discounting and Inventory Finance. |
Did you know for example that for the last 5 years March has almost consistently been the worst month in the year for insolvencies. According to the ASIC statistics this year there were 1095 External Administrations in March up from about 668 the previous year. Now given 2009 has been the first full year in which we have seen the effects of the downturn associated with the Global Financial Crisis, next March could be even worse as battered balance sheets, reduced margins and tightened bank credit take their toll. So why March every year?
What the Holiday Season Means To All Of Us :
1) We all have two week sales months in December & January........
2) We all still have overheads we have to pay.......
3) Businesses stop paying each other from early December until mid February its a regular cycle especially big companies where key people are on holiday to sign off on your payments.
It becomes a vicious circle nobody pays anybody because nobody has been paid, and this cycle doesn'tt normally stop or get broken until mid February. As a result those companies that are already in a very weak position often decide to call it a day or a significant creditor, the ATO or their bankers lose patience and the rest is history.
Here’s an example from our client files of what can happen......
In late January this year we had a civil engineering client that emailed us on a Wednesday night. The Finance Director of their largest customer was on 2 weeks leave, resulting in no-one being able to sign off on a significant interim payment, which the client urgently needed to pay his staff wages on the Friday. It was a very uncomfortable situation.
Now to get cash in 2 business days from a professional lender is almost impossible but because we work with working capital lenders all the time we called in a favour & secured a facility against two of the clients outstanding invoices, securing a small $70k facility in less than 48 hours to get the client through this difficult time. It was expensive but the alternative was worse......a building site with no staff and a broken contract had the potential to be terminal. With some careful planning this sort of experience can easily be avoided.
Nobody plans to fail they only fail to plan.
The key advice we would offer anyone in business is to get your house in order before the Holiday season really starts.:
1) Plan your cashflow until at least 31st March 2010 and work out where your gaps lie.
2) Get solid credit control structures in place. If you are selling now ask when you can expect payment & try to get commitment from your customers to payment prior to Xmas (if necessary negotiate an early settlement discount)
3) Chase outstanding debts hard now to hit the payment runs at the end of November otherwise you may not get paid until mid February
4) Chase any old debts hard before Xmas – otherwise they may turn bad next year
5) If you need to borrow get your application in place ASAP this time of year all lenders get backed up as so many companies try to get finance before the year end, and decisions are always delayed.
Raising Finance
The GFC has made it harder to raise finance resulting in :
a) Increased rejection rates
b) Increased costs
c) Delays to decision making primarily as a result of banks shedding 10%-15% of their workforce.
d) They also undertake their own due diligence - e.g. to ensure goods have been delivered.
If you need to borrow additional cash
a) Approach your bankers BEFORE a problem arises NOT as it arises. Lenders like to see a proactive approach to borrowing and hate surprises or being forced to make difficult decisions – their easy decision will be NO
b) You might want to consider multiple applications for funding but be aware that banks are very cautious at the moment about new to bank facilities.
c) You might want to also consider alternative sources of finance that don’t require real estate security – for example factoring & inventory finance – after all if your bank turn round and say no you don’t want to be left high and dry
Conclusion.
Because the next 4-5 months could be potentially difficult for all of us, it is essential that you plan your cashflow to at least 31st March 2010 and instigate appropriate measures. If you dont you might have an uninvited guest at one of your customer parties an Insolvency Practitioner - or worse at your own.
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About the author: Tim Lea has specialised in factoring and invoice discounting for the past 20 years and is a published author on the subject of factoring and invoice discounting. He is a partner of Cash Stream Financial (www.cashstream.com.au), who are specialists in raising factoring and inventory finance. You have full permission to reprint this article provided this resource box is kept unchanged
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