The Coronavirus (COVID-19) epidemic is taking its toll on Australian consumers and businesses. As of 30 March 2020, 4163 Australians were infected. The government has started offering relief to Australian businesses in need. The total economic relief package is worth $189 billion. Nearly half of that comes in the form of allowances by the Australian Tax Office (ATO). The ATO is taking unprecedented steps to minimise hardship for small businesses, but you need to take initiative to get the relief. The tax authority is spending $90 billion to help businesses survive the crisis.
You should familiarise yourself with the tax relief options available. Here are some provisions that could help your business.
At Banjo, we want our clients to grow, prosper and achieve their goals. From time to time, we all face challenges and we need to do our best to protect our livelihoods. Recent unforeseen events – floods, bushfires and now COVID-19 – have triggered us to prepare the following to help you:
1. Understand your cash position
The Australian bushfires and the coronavirus are examples of natural calamities that affect people and businesses in many ways. These effects include stress among employees concerning an uncertain future, the need for company owners to support their employees during recovery, the need to restore security with regard to finance and preventing further financial losses, and many others.
In this article, we touch upon the negative impacts that businesses are dealing with due to unforeseen natural disasters. We also talk about how businesses and people can get back on their feet, as well as the role of the Australian government in their recovery.
A natural calamity such as a bushfire or the spread of a virus (e.g., the coronavirus) not only affects people in general but also has adverse effects on businesses, company owners, their families, and their employees.
According to Moody’s Analytics, the economic consequences of the most recent spate of bushfires in Australia is projected to exceed the $4.4 billion record set by the Black Saturday fires of 2009. Besides, the devastating effects of this type of calamity are long-term and wide-ranging, requiring concerted efforts among the people, government, and business owners.
As for the coronavirus issue, companies such as Australian seafood exporters that ship seafood like lobster to China every day is already feeling the ill effects of safety fears and the closure of food markets. Other China-reliant establishments likely to experience the financial impact of the Chinese travel ban include the Australian universities that derive substantial portions of their income from Chinese students.
When natural disasters and other disruptive events strike, they can create a whole host of problems for business owners. They not only need to deal with problems such as structural damage and lost or destroyed inventory but also loss of productivity, employee morale, and income.
Thus, it is paramount for employee assistance efforts to be efficiently handled, and business owners need to take steps to encourage business recovery and revitalisation. Below are some of the things you need to take care of to help your people get back on their feet, as well as to restore your business.
1. Communicate regularly
One of the biggest concerns businesses hit by natural calamities need to deal with is communication. Ensuring employees that they are constantly updated on what’s happening in real-time and reassuring them that the management is taking the necessary steps to handle the crisis is crucial.
Let your staff know exactly what is going on and what they can do to assist with recovery efforts. Make use of email, messaging apps, social media, and all available company communication channels. Doing this will not only communicate the concrete steps you are taking to restore normalcy but also build up employee morale and trust in the company.
2. Provide a detailed outline of the next steps
After everyone’s initial reaction to a natural disaster has passed, there’s a need to have a concrete plan in place that will indicate what processes need to be done to restore order. Make sure you outline these steps designed to help you not only clean up the mess but also to resume operations even on a smaller scale. A well-known Australian retailer that has recently gone into voluntary administration is doing precisely this to save their business.
As this phase is underway, it’s especially important to keep your workforce informed about what’s supposed to happen next, especially with regard to office hours, flexibility to work remotely or part-time, time off from work, bringing children to work, etc.
3. Assist your employees in their recovery
Some businesses would have funds allocated toward providing employees not only financial assistance but also psychosocial support for recovery.
However, even if your resources are limited, you can still ease the burden of your employees by ensuring they can get help from local community outreach groups, churches, and federal and local agencies. Provide the contact details they need, help initiate contact with these establishments, and endorse your employees.
4. Seek mental health support
According to MentalHealth.gov, mental health includes our emotional, psychological, and social well-being. It affects how we think, feel, and act. It also helps determine how we handle stress, relate to others, and make choices.
If your business has been impacted by the bushfires or the coronavirus issue, the Australian government has programs designed to help business owners cope with stress. This type of assistance is critical in ensuring all individuals affected by natural calamities get the emotional and psychological assistance they need to cope with difficult, albeit temporary, circumstances.
5. Take control of your finances
The next step to getting back to rebuilding your business involves several considerations aimed at improving your financial standing. These include claiming insurance, getting your finances in order, and making sure that you are honouring your business obligations.
You need to get in touch with the pertinent government agencies such as the Australian Taxation Office (ATO) to get the help you need with regard to taxation and super guarantee contributions.
For help with funding your business, you can apply for a business financial support line through the government’s Australian Small Business and Family Enterprise Ombudsman (ASBFEO) office. You also need to communicate with your retailers concerning bank and utility bill payments, so they can extend the assistance you need based on your situation.
You can also apply for an unsecured business loan with an establishment like Banjo Loans. This way, you’ll get the support you need in the form of short-term cash flow that’s enough to get things started, so your business can achieve the level of normalcy it needs to recover.
If your business is financially struggling due to the bushfires or the coronavirus, you can also approach the Australian Securities & Investments Commission (ASIC) to help you make company fee payment arrangements.
As few as one in five SME's actively review their funding arrangements and shop around for a better deal. Perhaps some are already receiving what they need from their funding provider, or maybe they simply don't believe better deals exist. We believe that, for many, they simply do not have the time or the necessary insight to find the right funding. However, we believe that all SME owners should be reviewing their finance options every three to four years. This is why we have crafted this easy checklist for helping your small business to be ‘finance fit’.
Before you apply for a business loan, there are things you can do to improve your chance of success.
Start by considering these factors before you approach a lender:
It is also recommended to get professional advice from a qualified accountant or a finance/commercial broker.
Lenders will need to see documentation to support your application for business funding. Take a look at the list below and make sure your application is properly supported:
When it comes to streamlining your cash flow. There are two major types of business funding to choose from:
Generally, deciding on a loan term is relatively straightforward. The shorter the loan term, the less you will pay in interest, so aim to make your loan term as short as your capability to make the repayments allows. Often, term loans are used to fund some kind of business asset, and the term of the loan will typically match the life of this asset.
Of course business cashflow is important here, as this is what will be used to make the regular payments. The cashflow available for debt servicing (CFADS) is the available cashflow after deductions of working capital, financing costs and taxes. This will be used to determine the amount the business is able to repay monthly.
The final decision should be taken based on what suits the business' cash flow conversion lifecycle. For example, if a business takes out a loan for 24 months with a cash flow conversion lifecycle of 60 days, this can create an additional burden as the business will need to constantly boost cash flow to keep up with repayments. It is vital to take your own business' conversion lifecycle into account before deciding on a loan term.
In 2018, twice as many SMEs reported lower cash flow amounts at the end of the year compared to the beginning. When cash flow slows to a trickle, businesses struggle to grow and function properly. The Australian SME study, found that loan rejections caused 20% of Australian business owners to suffer from reduced cash flow. In turn, they had trouble financing their existing business debts. If you're worried about business debt financing, take a look at your options below.
Have a meeting with your accountant and talk about growing the expenditure residing in your balance sheet in regards to Research & Development. Perhaps you have options to monetise your R&D accrual by setting up quarterly advances on the amount due. It's important to tread carefully with this option because it could be risky if the Australian Government doesn't approve your full R&D claim.
Establishing a property holding company is an excellent opportunity to sit down and go over your business premise with your accountant. This is usually found on the balance sheet at historical cost and pledged to the bank for security purposes. It's a very under-utilised asset when it comes to financing business debt. Your accountant should be able to help you establish a new property holding company and transfer the property's ownership.
We have seen multiple clients establishing operating and property holding companies over the past five years with tremendous success. The bank can revalue the property and potentially find a loan-to-value ratio of 60% and implement it at some of the lowest rates Australia has seen in history.
You can then repay any terms loans with the additional proceeds you raised from establishing and gearing a new property holding business. Utilise the rest of the proceeds to deleverage your operating company. Many business owners extinguish their term loan debt in their operating companies, and this results in it being the sole entity that holds the trade lines and working capital. It has much lower leverage, and the company can be more competitive.
Historically, the four big banks manage the entire cradle to grave relationship with their business banking clients by offering 100% of the short-term funding, tradelines, core term debt and asset finance. Post Royal Commission, the banks appear to be ‘on the nose’ and SMEs have lost confidence in their historical banking relationships. Post GFC, the big four banks continue to focus on home loan opportunities or on the corporate end of business, leaving the little guy out in the cold.
In Australia, the past five years have seen a raft of non-bank lenders start designing and providing specialist services that effectively disintermediated the 'old world' banking market. The historical "whole bank" relationship has begun to deteriorate, and many SME business owners have begun shifting 30 to 50% of their total banking services to non-bank lenders.
The advantage these non-bank lenders have is their speed to market, great user experiences and customised product solutions. Customers seem to appreciate what non-bank lenders do more than the 'old world' banks. Evidence shows the Big Four struggling to keep up with Trustpilot scores of 2.5 or less and negative 1 to negative 10 Net Promoter scores. Looking at the non-banking lenders, they have scores that exceed 4.8 and 70, respectively.
So, what options can the SME business owner consider? They can review their balance sheets and find opportunities to leverage and monetise.
Non-bank lenders like Banjo or Octet can and do move quickly. They can establish short-term specialist trade lines to assist businesses with importing or exporting goods. Doing so funds the trade cycle in a user-friendly and efficient manner.
The operating business has the option of using non-bank lenders like Banjo for short-term working capital requirements instead of the 'old world' big bank. They often provide finance up to $500,000 on terms ranging from 6 to 24 months within 72 hours. This quick funding allows companies to focus on generating a return on investment by moving quickly on any new opportunities. Non-bank lenders also typically double as cash flow lenders and will not register landed security over your business assets.
Once you issue invoices to your clients and they're outstanding, your cash flow is within your grasp. Focus on accelerating the cash conversion cycle by utilising invoice financiers. This allows the company to grow. With the reduced appetite of the big four banks and disintermediated banking services providing debtor finance, you have options. Non-bank lenders like Octet and Scottish Pacific provide invoice discounting quicker, cheaper and simpler.
If you need to finance business debt, you have options available. You can monetise your R&D grant claim through the government, establish a property holding company or short-term trade lines, use working capital finance or approach a non-bank debtor financier. All five options can improve your cash flow and help your business thrive. Talking with your accountant will help you decide which one is a more viable option for your company.
Healthy customer relationships are key to long-term business success. Instead of focusing entirely on new customers, it's important to look after your existing market by building valuable relationships that endure over time. Long-term viability demands both customer retention and customer acquisition, the only question is how to develop these relationships in alignment with your business goals.
According to Bain & Company, businesses who increase their customer retention rates by just 5% can benefit from a profit increase of between 25% and 95%. At Banjo, one of our main cultural drivers is to build deep, strong relationships with our customers. When 80%+ of our customers come back to us to reborrow, we know we’re doing something right.
Let's take a look at 7 effective ways to build stronger customer relationships, so you can reach your business potential.
Taking the time to understand your customers is the first step towards business success. Not only do you need to constantly touch base with your customers via engagement surveys and online chats, it is also good every now and then to reach out and call them. The more understanding you have around your customers and their drivers the more ammunition you have to provide them the best service.
In addition to the individual information you garner, ongoing customer profiling and market research, can help you understand the needs of your customers and mould your processes to be the most effective to your audience. Information is key, and customer segmentation, marketing, and communication much more effective when it's based on accurate demographic data.
Developing a "customer first" mentality means more than just customer management, it means going above and beyond with every customer-related decision you make. It's important to empathise with your customer base, focus on the details of the relationship, and be prepared to ask questions when required. Once developed, good customer service is a habit that continues to strengthen your business year after year.
Putting your customers circumstances first needs to be key to the business decisions you make – e.g. product enhancement and services offered.
While anyone can tick boxes and match people with products, only the best have what it takes to surprise, delight, and inspire action. Developing an "above and beyond" attitude requires relational intelligence, with real business leaders able to reach out and engage with the market.
Measuring customer service levels and listening to the feedback from your customers is a great way to start. After all, how can you improve when you don't even know where you currently stand? If you breed the right culture in your work place going above and beyond for your customers becomes the norm. And customers repay this exceptional service with loyalty.
Valuable feedback from people engaged with your business is critical to your organisation. It's important never to shy away from feedback, and to show appreciation whenever it's offered. Even a bad review can be beneficial; in fact, they're normally the most beneficial of all. Ask considered questions, listen carefully to answers, and be prepared to adapt and evolve your processes in order to meet market needs.
Using smart tools such as Trust Pilot and Net Promoter Score allow you to gauge the success of the service you are offering. However, it is only by engaging and truly listening to your customers that you can continuously improve and offer the best service you can.
Regardless of your business type or your key demographics, everyone likes rewards. While friendly and open communication is all well and good, sometimes it's important to boost customer relationships with something more tangible, and more mutually beneficial. Whether it's loyalty points, discounts, specials, or cross promotions, there are lots of ways to let your customers know that you care. Be innovative, be different, but always think of it from the view of “what’s in it for the customer”.
While customer acquisition is important for growth, customer retention should always be one of your top priorities. The cost to acquire a new customer can often be large. Compare this to the lifetime value of a loyal customer and it becomes a no-brainer to focus on customer retention.
You can develop CRM tools that focus on retention in order to keep track of returning customers and improve loyalty rates over time. It's important to treat each sale as the start of a relationship, rather than the end-game. Treat customers as your partners rather than your clients. And show them you appreciate them - send them thank you notes, provide discounts on repeat business or simply recognise them on social media. Simple things can go a long way.
In the age of big data and vast global, digital networks, a personal touch is more important than ever. By segmenting your market and reaching out to them on their own terms, you can build relationships based on trust and mutual respect. A small personal touch can have a huge effect, with tailored messages and birthday specials a great way to build customer satisfaction and loyalty over time. Implementing a CRM system along with a marketing automation system can help you to achieve personalisation at scale.
While it might seem obvious, few SMBs choose to invest and focus on customer satisfaction and loyalty. In a world where growth targets rule supreme, it's easy to forget about your existing customers and the important role they play in your long-term success.
Business financing is about more than just achieving the capital needed for growth. It is about developing a relationship with a broker or a lender that can stand the test of time, and that can connect SMEs with the benefits of Australian alternative finance
Let's explore this more deeply, and find out why increasing numbers of SMEs are opting to develop these all-important relationships.
Business owners know that effective growth requires capital from outside of their personal resources. This means establishing trust between themselves and their lender, or another source of external capital.
When this mutual relationship grows stronger, the lender and the client are able to identify the right opportunities to enhance their financial position, through good and bad times. This is the direct opposite of the pejorative term "fair weather banker" -- i.e. a lender who provides an umbrella during sunny days and takes it away when the rain starts to fall.
This has always been the way. Historically the lender was the "primary" relationship for the business, providing consultation and advice as well as straight-up capital. These lenders were able to translate the quantitative and qualitative factors of their client's business, and then use this as a means to get funding approved.
This kind of close personal relationship is becoming increasingly difficult for big banks, who prefer to apply one size fits all products and terms to SME business segment.
It is this "dehumanisation" of the banking sector that has driven so many SMEs away from traditional lenders. Banks now rely upon rigid risk models when deciding whether or not to approve a finance package, and are unable -- or unwilling -- to get to know the candidates on a more personal level.
SMEs are the driving force of the Australian economy and represent a diverse array of business entities with a similarly diverse variety of needs and prospects. Instead of recognising this, most banks now treat SMEs as a segment -- as one homogeneous whole -- which puts businesses at a serious disadvantage when they try to secure funding.
This problem is underscored by the decision taken by several banks to remove relationship management coverage for SME exposures below $1m, and centralise the ‘management’ of these customers through call-centre style platforms. Even with SMEs that enjoy the services of a 'relationship manager', these services tend to be covered by a banker with a portfolio of as many as 200 customers -- double the level it would have been pre-GFC. It's easy to see why the quality of such a relationship would suffer.
The decline of SME relationship banking has allowed new players to enter the scene -- players that can work with the individual requirements of their clients, and use a more human approach combined with the best of technology as an enabler to achieving the capital funding that SMEs so sorely need.
One of these players is the broker; a third party entity who acts as a go-between for SMEs and lenders. In 2007, only 10% of commercial borrowers were working with these brokers, with the rest viewing them either as unnecessary or as an unwanted extra cost. By 2019, this figure had risen to 40%.
So what is changing?
One key factor is a shift in the perception of broker services in terms of value. When we consider the SME-lender relationships discussed above, and how these relationships have suffered in recent years, we begin to see working with a third party broker -- someone who is better equipped to develop this real, mutually beneficial relationship -- would become more attractive.
Another factor is that it is becoming difficult for SMEs to secure funding via traditional means. A broker can open up a world of other possibilities for businesses, greatly increasing their chances of achieving the line of credit they need. But what exactly are these alternatives, and why are they so valuable for SMEs?
Tighter credit conditions have made it more difficult for Australian businesses to secure the funding they need. Traditional lenders have become more cautious when working with SMEs, leaving a hole that has been filled by newly created lenders and digital banks.
Among this new crop of lenders are Judo Bank and Banjo Loans; two of the players in the new Australian SME financing market. These lenders are not only better positioned to provide the necessary capital, but also to operate the close working relationship that SMEs need.
The above shift in thinking is reflected in Scottish Pacific's SME growth index, reporting that the percentage of SMEs who look to big banks for growth funding has halved in five years, dropping from 38% to 19.5% since 2014. The report states;
“The top three frustrations involve loan conditions (just over 80%), having to provide property security (79%) and loan inflexibility (73%). And more than 91% of SMEs would be prepared to pay a higher rate to obtain finance if they didn’t have to provide real estate security.”
The funding environment is changing, and relationships between SMEs and lenders are evolving to match this new ecosystem. For Kevin Wheatley, one of Australia's top commercial brokers, the reasons behind this are obvious;
“When you’re in this environment and institutions have tightened, this is where you have really got to apply yourself and look at where alternative funding streams can come from.”
It is worth noting that, in the first six months of 2019, 80% of the funds Wheatley has secured for his clients have come from private sources or non-bank institutions.
So where does this leave SMEs in a changing world where traditional banks are changing their business models?
Well, in light of this evidence, we can see that small business need to be more open to alternative forms of capital. This means working with lenders and brokers who can not only secure this capital but can build a strong, lasting relationship with their clients, whatever the financial weather.
Those lenders and commercial brokers that focus on placing the customer at the centre of everything they do irrespective of external macroeconomic factors and events -- those alternative financiers and brokers who can and do build strong relationships based on mutual integrity and honesty. It is these entities that Australian SMEs will be partnering with for their growth.
By Steven Dooley – APAC Currency Strategist, Western Union
As we enter the new financial year, businesses with foreign exchange exposure might be facing a tougher-than-usual time.
With global growth slowing, and major central banks cutting – or considering cutting – interest rates, FX volatility might rise.
Why? FX markets, like most markets, try and place value on a currency by looking into the future. If the future is less certain – due to slowing growth and potential rate cuts, for example – then volatility rises as markets try to adjust to an uncertain future.
For businesses with FX exposure, volatility equals risk. A moving market means an uncertain cost or an uncertain profit in your business.
For local businesses, the risks are even more pronounced. As we enter the new financial year, the Australian dollar faces three big risks.
First, the Aussie might be pressured by further big moves in financial markets. The AUD is closely tied to global risk appetite. When investors are feeling positive, and global sharemarkets are climbing, the AUD tends to climb as well.
On the other hand, a big selldown in financial markets might cause the AUD to fall. We’ve already seen sharemarkets experience some big falls over the last 12 months with the global economic slowdown and increasing tension from trade wars the main reasons for the selldown. Further nervousness in sharemarkets might pressure the AUD further.
Second, the Australian dollar is often driven by the health of the Chinese economy. As our largest export market, the fate of the Australian economy is closely tied to China’s performance. With Chinese growth recently slowing, this is another risk for the AUD.
Finally, the biggest risk is further interest rate cuts from the Reserve Bank of Australia. The RBA cut rates to a historic low of 1.25% in May and the market expects another cut by October.
The RBA’s moves to cut local interest rates have already had an impact on the Australian dollar.
The AUDUSD fell to ten-year lows earlier in the year and has recently moved back towards these levels. Clearly, the game is changing for businesses with FX exposure.
For many businesses, the move below 0.7000 in the AUDUSD has seen the market move below their internal budgeted rate. These kinds of move can create short-term cashflow problems. One way to manage these problems is to reach out to Banjo Loans for a short-term funding solution.
As we enter the new financial year, these businesses need to consider whether they have set the correct budget rate for their business.
When setting a budgeted rate, consider these questions:
Is the budgeted rate competitive? Your budgeted rate is a core component of your cost of goods and needs to allow you to win business versus your competitors.
Is it realistic? It’s all very well to have the best budgeted rate that results in a very cheap product, but if it’s not realistic, it will end with a major FX loss at the end of the financial year.
Is it achievable? A budgeted rate, while necessary, introduces risk into your business. You can manage that risk by hedging, but can you achieve that rate today? If not, the risk becomes immediate.
Once you have an effective and useful budgeted rate, by implementing an FX risk management policy and hedging your FX exposures, the budgeted rate can become a “worst-case” or “floor” rate.
The budgeted rate – for better or worse – becomes an internal risk so managing this risk is important.
This is why we say the budgeted rate needs to be achievable, because a budgeted rate that can’t be currently hedged at that rate becomes an instant risk and can potentially become a major distraction for a management team that should be focused on other topics.
With some hedging products, a “worst-case” rate is locked in, but you may still have the ability to benefit if the market moves in your favour.
From this perspective, businesses can have the best of both world: potential FX losses are avoided while the business will benefit if the market moves in their favour.
Of course, the ability to manage both side of the market in this way comes at a cost. The rate you achieve to hedge in this way is typically less attractive than the rate you might achieve in the traditional spot FX market.
For many businesses, the decision about how to hedge will come down to the individual characteristics of their business. Businesses with low-margin, commodified products might have less opportunity to explore alternatives compared with other businesses.
Regardless, all businesses will find that approaching their FX risks with a more methodological and strategic focus is likely to bring benefits. For more information, speak to your accountant.
In this series, we've examined the severe storm that today's wholesalers and retailers must weather in terms of cashflow issues, as well as some of the way responsible inventory management can help to minimise these problems. Today, we are going to be focusing on measurement, and introduce some of the key metrics retailers and wholesalers can use to keep on top of their cash flow.
In simple terms, the cash conversion cycle - or CCC - is the length of time, measured in days, taken for a company to convert the investments and assets in its inventory into cash generated from sales. There may be other resources which are also factored into these calculations, but, for most businesses, the bulk of this cashflow will be coming from stocked products in inventory. And this is important - as a business owner, you invest in products because you want them to sell and generate profit for your organisation; understanding how quickly this is achieved is vital.
So, the quicker you can convert invested cash into end returns and profits - i.e. the lower the ratio of the CCC - the better.
Calculating the CCC means considering three distinct stages of the cashflow conversion process.
Firstly, the existing inventory level is taken into account, and we consider how long it will take for a business to sell off its inventory. This is represented in the calculation as Days Inventory Outstanding - or DIO.
DIO = (Average inventory / COGS)*365 days
Secondly, the calculation examines the current sales and the time taken to collect cash generated from these sales. This is the Days Sales Outstanding figure - or DSO.
DSO = (Average Accounts Receivables / Revenue)*365days Thirdly, the calculation focuses on the current outstanding payables relating to the business. This usually relates to money owed from the company to its suppliers for the current inventory. In terms of the calculation, the figure is the time period, in days, for the company to pay off this debt, and is represented as Days Payable Outstanding.
DPO = (Average Accounts Payable / COGS)*365 days To complete the calculation, we use the following formula;
Cash Conversion Cycle (CCC) = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payables Outstanding (DPO)
or;
CCC = DIO + DSO - DPO
Getting these three smaller calculations right is vital, however, and these must be completed before the cash conversion cycle can be gauged.
What is it that makes the cash conversion cycle such an important metric for your business? There are actually two key factors here. The first is that CCC is a clear indicator of efficiency in handling and managing working capital assets, particularly critical assets such as inventory. The second is that CCC offers a viewpoint from which to gauge liability management; i.e., how effectively is a company able to pay off its current liabilities.
Most contemporary financial reporting focuses on quick and current ratios, designed to measure how quickly an organisation can sell its inventory to make way for more stock. However, the CCC takes things a step further, measuring how quickly the company can turn this inventory into sales and then turn these sales into receivable cash, making this ratio a far better demonstration of company liquidity.
The CCC also helps us to identify where cashflow issues are coming from. The longer the inventory remains unsold, the longer it takes to collect the accounts receivables. When we factor in a shorter payment window for debts to company suppliers, we can deduce that cash is being tied up in inventory, and available cash is being quickly depleted as trade payables are managed. Over time, this trend will squeeze the available cash a company can draw upon, greatly reducing liquidity.
This is why the CCC's individual components are so critical to business. Business owners can use these smaller calculations to spot positive and negative trends in the way in which their company manages its working capital. When the CCC ratio is lower, there is less need to borrow additional capital, and more opportunity to achieve pricing discounts through direct cash purchases on materials. There is also an increased capacity for growth and expansion. This is what we should be working towards.
Let's look at how CCC works. As an example, John is a wholesaler selling bathroom accessories to large residential developments. John purchases his inventory from one main vendor and pays off the outstanding balance on accounts within 30 days to achieve a discount. The inventory turnover rate of John is 4 times a year, and he collects accounts receivable from large property developers generally within 45 days on average.
This translates to;
Days Inventory Outstanding (DIO) - 90 days
Days Sales Outstanding (DSO) - 45 days
Days Payables Outstanding (DPO) - 30 days
DIO + DSO - DPO = 105 {compare to average SME at 84 days} So, John’s cash conversion cycle is 105days. In other words, it takes one hundred and five days to get from paying for inventory to receiving the cash from the sale.
PWC’s working capital study highlights how the CCC is strongly favorable for large organisations compared to smaller businesses. This is driven by things such as better processes, superior systems and most importantly positive payment terms leveraged by simply being large. According to the PWC report the average CCC for large enterprises is 37 days (just over a month) compared to 64 days for a mid-tier enterprise and a staggering 84 days (nearly a quarter of a year) for small business. A significant difference.
Based on the above, at a minimum, John can look to improve his current CCC from 105 days to a minimum of 84 days (as suggested by PWC). This can be achieved by focusing on supply chain management to reduce inventory levels, debtor collection (offer discounts for 7-day payment or offer online settlements) and negotiating better payment terms.
Over the course of this series, we've really got to grips with some of the cashflow issues affecting Australian retailers and wholesalers. We've analysed some of the factors which are harming cashflow, and how alternative finance can provide a solution. We've also looked at how better inventory management can reduce the strain caused by cashflow, and outlined some of the calculations and metrics you can use to monitor cashflow in your business.
Together, these elements help you to create a robust defence against what is potentially a catastrophic issue. Measure your cashflow, manage and mitigate the factors which impede it, and secure high levels of efficiency and efficacy for your organisation.
