An unfortunate reality for SME owners and budding entrepreneurs alike is the failure rate of businesses. In Australia, almost half (48%) of all new startups fall apart within their first four years of operation, and nearly a quarter never even make it past the 12-month mark.
What’s the common thread? Money. Indeed, maintaining steady cash flow is a bugbear for businesses of all sizes, but especially SMEs. That’s why unlocking the power of working capital can lead to incredible wins for your enterprise. With so many myths swirling around business finance, we’re here to debunk them and put you on the path to success.
The biggest myth that many SMEs believe is that they should always hold lots of stock. According to Wayne Morris, CEO of Fifo Capital, this is because they worry about not being able to meet customer orders.
“What tends to happen is that they end up carrying too much inventory,” Morris says. “When they tie up cash in that stock, the cash is essentially dead until they can sell those items. And if something happens or the market changes, then that stock might not retain the value it once had, or it might be effectively useless.”
Morris reflects on a client he dealt with who supplied toiletry goods to a major supermarket. The SME held pallet loads of the product, but when the supermarket pulled the pin — giving them three months’ notice — they were left holding way too much inventory and had to sell it at a loss to another retailer.
“That’s because they were overstocked thinking they needed to always have enough stock on hand. But they should have taken a lesson from Toyota, which introduced the just-in-time strategy. They optimise their stock levels to ensure they never carry too much — they have just enough to meet demand. The same strategy can apply to SMEs dealing with seasonality. You want to be holding enough inventory and the right inventory when running a business.”
Extending supplier terms to maximise cash flow is a common tactic in the business world. You pay suppliers slowly to keep cash flowing through your company. It makes sense — if outgoings slow down and ingoings remain steady, it helps your cash flow and working capital. But the myth is that it will help your business, when in fact it can damage your reputation.
“What this does is it frustrates your suppliers,” Morris says. “Bottom line: you are paying people weeks and sometimes even months after they’ve invoiced you.”
To solve this problem, Morris says that SMEs can get their invoices financed, which allows them to pay their suppliers within the normal terms or even earlier. In other words, use the finance to pay off supplier debts after 30 days and then pay back the lender in say 90 days.
“It’s only going to cost you a small amount in interest to do this, but it keeps your suppliers happy and engaged. So rather than delaying their payments, you are essentially passing on the extended terms to your financier. You get the same benefits without upsetting your supply chain.”
Too many businesses think profit is cash flow. “It’s not,” Morris says. “They assume they’re profitable just because they’ve got a good P&L statement, but the reality is that cash flow is very different. And profitability doesn’t guarantee that you’ve got positive cash flow.”
What’s more important for SMEs and business owners to understand is their cash flow position. Morris recommends getting to grips with and monitoring cash flow through forecasting, this will help keep your finger on the important numbers
“Know the difference between profit and cash flow.”
For Morris, the number-one piece of advice he gives to SMEs about working capital and cash flow is to stop looking at loans as a fix-all.
“A loan is just a Band-Aid,” he says. “If you’re looking at a loan or needing finance to survive, there’s an underlying issue. As an SME, don’t just get a loan to fix it today. Look deeper at things like your payment terms and your customer payment terms, which savvy SMEs can adjust with smart finance solutions like Fifopay to fix working capital and cash flow issues. Once those issues are solved, they are solved for the life of your business.”
Conducting regular health checks is something every SME should be doing, Morris says.
“Assess your working capital and cash flow, identify areas where there are weaknesses – that could be slow-paying customers or poor supplier terms – then look for ways to improve them without jumping straight to finance,” he says. “Your clients might be happy to pay early if you give them different ways to pay. Or suppliers might be happy to give you better terms if you just speak to them about it.
“Wherever you are at with your cash flow, do a financial health check of the business first.”
Plus, take advantage of Fifo Captial’s $500 account credit for new Fifopay customers*
*Terms and conditions apply.
Fifo Capital empowers SMEs to optimise their working capital and put an end to cash flow problems. With Fifo’s award-winning finance solutions, you can access up to $2 million in revolving funds to supercharge growth. Beyond financing, Fifo’s expert team offers unwavering support, guiding you through common pain points such as late payments, rising inventory costs, overheads, and sales fluctuations. Take the strategic leap into sustainable finance and break free from the trap of quick fixes. Partner with Fifo to secure your business’s future. Do More. Win More. Grow More. With Fifo.
