Wayne Morris, CEO of Fifo Capital.
This practical guide will show you how to maximise cash flow and employ the same ‘super smart’ strategies big business CFOs use to dominate markets. Learn how small businesses can leverage these techniques to enhance cash flow and foster growth.
Why you need to know this
It’s crucial for small businesses to harness the power that exists in their accounts payables and accounts receivables. The time has come for the 98% of businesses to be empowered with the financing they need, not only to boost profitability but also to build resilience in the face of challenges. And it’s equally important to recognise that business loans have their place, but that place isn’t in resolving immediate cash flow challenges. Small businesses need strategies that go beyond loans to address and overcome cash flow constraints effectively.
Understanding your cash cycle
Your cash conversion cycle determines how long it takes to see a return on investment after purchasing stock. A prolonged cycle negatively impacts cash flow, as funds are sent to suppliers long before they are received from customers.
In fact, “The number one reason SMEs go bust is cash flow,” says Wayne Morris, CEO of Fifo Capital. “And a lot of small businesses underestimate the impact that their customer credit terms (CCC) have on their cash.”
Which way does your cash flow?
Think about it: You’ve got your staff wages, and all the costs associated with buying or making your product. With that money out the door, you might then be waiting 30, 60, 90 days—or even longer—for payment from your customers. And in the meantime, you need more cash to sell more product.
These kinds of cash flow constraints are not only stressful for small business owners, they also make it difficult to scale.
A short cycle is a good cycle
There are a few ways you can tighten up your CCC, but two of the most practical are paying your suppliers later, and getting paid by your customers earlier.
You can do both these things without compromising your relationships in just the same way big businesses do, “because they’ve got super smart CFOs who know all this stuff”, Morris says. Their secret weapons? Trade and invoice financing.
If the idea of using financing freaks you out, remember that business loans and credit cards are a form of financing—and often have much steeper terms than the average 1.5% financing fee that Fifo Capital charges, for example.
And if you’re smart, you might be able to negotiate supplier discounts of up to 5-6% for early or immediate payment of invoices. This will cover and then some the cost of using trade financing to upfront the cash, making you a tidy little profit at the end of the term.
You won’t necessarily profit directly from invoice financing, unless your customers are happy to fork out a small extra fee for extended payment terms—say, an additional 2% of the invoice. But the cost of invoice financing can be offset by those supplier-side gains.
On the other hand, you might find the growth potential makes any costs incurred more than worth it.
Companies using these strategies to smash it
More and more small businesses are being more strategic with their finances to achieve greater predictability, resilience and growth in their operations. Take Norton Motorcycles in the UK as an example. They used to ask overseas dealers for a big 50% deposit on new orders. But with invoice financing, customers now only need to pay a small deposit, simplifying the sales process and making it easier to sell the product.
Norton also uses invoice financing to offer friendly 90-day credit terms to foreign dealers, helping them grow quickly in overseas markets. What’s even better is that the cost of financing is balanced out by getting discounts from supplier-side discounts for early payments, through trade financing, strengthening their financial position.
In another example, an Australian manufacturer specialising in environmentally friendly materials for infrastructure projects negotiated a $24K early payment discount on a $300K invoice, due in January. The manufacturer used trade financing to upfront the invoice, and didn’t pay a cent of their own until late February—netting a cool $15-16K once the 1.5% financing fee was deducted.
Finally, an Australian provider of security services uses trade financing technology to send automated messages to its many suppliers every payment cycle. The tech prompts the suppliers to select what kind of a discount they would be willing to give for early invoice payment.
“This company, instead of phoning its suppliers up—because it’s got too many suppliers—uses the technology to drive discounts, on the basis that a certain portion will always take a discount,” Morris says. Over time, those savings are really adding up.
Top tip for negotiating supplier discounts
As a small business, the worst thing you can do is go to your suppliers and say, “Would you give me a discount if I paid you tomorrow?”, Morris says.
Instead, he recommends first finding out the best price a supplier can give you based on your regular terms, and only then asking if an additional early payment discount is up for grabs. Because “there’s always a bit more ham on the bone, and you don’t want to play your cards too early.”
Simplify your profit growth
Making your business more profitable doesn’t have to be complicated. By streamlining your processes, you can easily get discounts and improve your bottom line. For example, identify suppliers who are likely to offer discounts based on their practices with other businesses.
Integrate these streamlined processes with your accounting system to keep an eye on your cash flow and receive helpful tips for improvement. This approach also reduces risk by checking the credit ratings of suppliers to avoid financing invoices from shaky sources.
Keep your use of trade and invoice financing confidential from your suppliers and customers if you prefer.
Using Fifopay technology, you can seamlessly integrate with your accounting software to monitor your cash flow and provide tips on how to improve it. And it can minimise risk by checking the credit rating of suppliers, so you’re not financing invoices to those on the brink of collapse.
And your suppliers and customers never need to know that you’re using trade and invoice financing if you don’t want them to.
The shortfall of business loans
The long and the short of it is that business loans, as Morris puts it, “are just a Band-Aid over a bigger problem—they aren’t a solution.”
Instead, he recommends embracing “things that might feel a little bit more sophisticated to start with, but which are ultimately there to help you. And looking at ideas that would normally be reserved for bigger businesses, which are now becoming available for everybody through technology.”
Imagine how much smoother your business could operate without the constraints of cash flow challenges.
Read now: Busting financial myths: Strategies for SME success
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.
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