Cashflow is the lifeblood of our businesses. With some of the government coronavirus business packages set to end or start phasing out – most notably JobKeeper – now more than ever is the time to plan and manage your cashflow before we reach the “stimulus cliff”.
Lance Rubin CEO and Founder of Model Citizn joined a Banjo webinar recently to talk about how cash flow analysis can help SMEs make better decisions for the future of their business.
Lance explained that cashflow modelling is a process of designing and constructing a decision-making tool for the various scenarios that can impact your business.
Also known as scenario analysis, it can help you plan mathematically for business risks and see what the cashflow outcome would be. Scenario planning is about looking forward, not backwards, using numbers.
Some typical scenarios could include what happens if:
It also helps you pinpoint if you have a sensitivity to one particular variable in your business, for example: staffing levels, or one large debtor.
Do you know how long your current cash reserves will last?
What impact will JobKeeper tapering off over the next 6 months have on your business?
Will you be affected when some of the other stimulus measures end?
In the light of this consider what are your business options now, and what might those look like if you did something different. It could be pivoting your business to a new market, reducing staff hours or numbers, or sourcing materials offshore. You can play with the different scenarios, and while not all of them will work for you, it will give you ideas and choices. It’s good to have options.
Having the ability to play with this is key. However, it does need to be well set up in the first place. You can use a variety of tools on the market, or simply start with a spreadsheet. Various types of cashflow analysis can be produced from the information you already have, such as: income statement; balance sheet; cash flow statement.
Lance demonstrated via live charts the effect on the cash flow position of pulling various business levers. If we make changes to ‘x’ or ‘y’, what impact will that have on our cash?
Ideally, work with your accountant, who can help with the compliance and legal knowledge. Most importantly, know what you want to find out from this. Start with your historical cash flow; look at your profitability; get it all put in a spreadsheet that you can change.
This could be vital if you’re looking to borrow or top up your loan. Traditional lenders often just look at historical data, which is only an insight into the past. While many of the new wave of business lenders do take into account past data, they also place a strong focus on future cashflow analysis. This will also be true of other stakeholders in your business.
Being able to explore potential scenarios will help to reduce uncertainty you may feel about the coming months as you navigate the changed business environment. While nothing can provide complete certainty, cashflow modelling can help reduce anxiety about the future.
The second wave of coronavirus lockdowns in Victoria has caused a delay in our national economic recovery, but there is hope over the horizon.
Even though the lockdown is in only one state, it has meant a large chunk of the national recovery timelines have been pushed back 3-6 months. This is largely because:
Andrew Charlton, economist and director of research firm AlphaBeta said “It’s clear that the Victoria lockdown is having a psychological spending impact across Australia,” he said. "The impacts are being seen as far as WA – which shows that even with border closures, you can’t keep out the economic impacts of COVID-19. Confidence will only get back on track once there are clear measures in place – across all governments – about how we manage to live and work with the threat of COVID."
Demand drivers are missing
Predictions are that in 2021 the average unemployment rate could be as high as 8.8%. This means consumer borrowing ability and wage growth will be low.
Population growth that helps drive consumption and investment will also be well down - possibly half the normal rate of growth. This is due to
These demand-driven factors will hurt business investment and growth.
There are some industries who have already been hit very hard and won’t see revenues return to anything like pre-COVID levels for a while. If businesses in these industries have large debt we can expect two things:
Now for the good news
Australia is better off than most economies globally, having sustained the least impact on GDP among the group below.
The Government has produced some well targeted stimulus to date and there is still enough in the coffers to spend. Compared to many others around the globe our gross debt to GDP is relatively healthy at well below 50%.
With record lows the cash rate can’t go down, therefore there is pressure on fiscal stimulus. The Government will probably respond and adjust their stimulus packages.
As restrictions start to ease, businesses will re-open. From our long experience of business owners we know they are innovative, positive people and good leaders. There is evidence of this in all States across Australia (Victoria will pick up later) where confidence is returning.
Lending will be the cornerstone for investment and growth. Each business loan application will be looked at based on their unique circumstances. Lending for growth will now require a forward projection assessment instead of purely relying on historical performance. This in turn requires the lender to be able to access business’s financial data and forecast positions. On this basis, traditional lenders will struggle to approve loans or change their model. Alternate lenders like Banjo are key to helping drive the economy back.
Banjo was delighted to have recently hosted an exclusive client webinar, featuring David Robertson, Head of Economic and Market Research at Bendigo and Adelaide Bank, a valued Banjo partner. This is a snapshot of David’s webinar, three months on from his last one.
This has been the deepest contraction in Australia in living memory, but the good news is we are on a slow path out of the recession. With Melbourne/Victoria on a slower trajectory due to their second wave of COVID, this means it’s likely to be more of a W-shaped recovery overall.
Employment
There were 13 million employed Australians just before COVID. This fell to 12.1 million at the height of the crisis in April/May and is now back to 12.46 million. The industries that are suffering the most are hospitality, the arts and recreation.
International trade
China has been first out of the downturn, with a classic V-shaped recovery, which is now well-entrenched. Indirectly this is good for Australia, since they are our strongest trading partner. Despite the well-publicised barley/wine/beef export issues, Australia has been trading at record highs with China on commodities, especially iron ore and gold.
Government support
Australian fiscal support packages have buoyed spending and lessened the impact, with Jobkeeper and Jobseeker instrumental in helping the economy. It’s paid for by federal government debt through quantitative easing, but the good news is Australia can easily afford it. Government bonds are the cheapest they’ve ever been.
Our gross debt to GDP has gone from around 30% to 35% and is forecast to reach 45% by early next year. As a triple A rated country, this is not a problem, and the RBA will be comfortable with 50%.
By comparison, the US debt level to GDP is 110%!
Consumer spending and property
Remarkably, retail sales are 12% higher today than they were a year ago. As a nation, we’re spending more on food and household goods, than this time last year. Other than Victoria, restaurant bookings around the rest of the country are higher today than a year ago.
There is a change in preferences around how we shop. Spending in stores other than department stores, has increased.
Australian consumer sentiment has followed a W shape, but business confidence is rebounding well.
The owner occupied housing market is holding up very well, although the investor side is under stress. In some capital cities - Hobart, Adelaide, Canberra - prices have hit record highs, while the other capital cities fell by over 1%. Demand for regional property has also been very high, and prices there have risen on average 0.3%. Working from home has proven to be quite effective, and so far we have proved that the technology can support it.
Markets
Stock markets have recovered well already. Investors are looking at long term – 4 to 5 years of performance – and are expecting a return to profitability. We are now in a new general multi-year up-trend from here.
Commodity markets have bounced back strongly. In agriculture the drought has generally broken. There are no signs of inflation. However, early withdrawals from super are a bit worrying for the long term.
We are in the midst of the greatest technological revolution in history, and there is a lot of confidence that it will accelerate. The Australian AllTech Index is powering ahead.
The outlook for SMEs
With SMEs, David suggests there is a diverse range of outcomes based on location or industry, resulting in a K-shaped recovery. Some businesses are recovering nicely and will continue to do so, while some others won’t get back on their feet.
Larry Fink, CEO of Blackrock recently said, “People worldwide are fundamentally rethinking the way they work, shop, travel and gather. When we exit this crisis, the world will be different.”
For SMEs, the businesses that can best thrive will be those who rapidly adapt to the post-pandemic society. So now is the time to invest in technology and innovation, especially with interest rates so low.
There are also lots of opportunities to take advantage of all the government incentives currently available to support businesses.
Mars anyone?
The 1990 classic movie “Total Recall” has Douglas Quaid buying a virtual holiday to Mars from Rekall Inc. who sell implanted memories. Some 25 years later, we are not quite purchasing virtual holidays or implanted memories, but we are increasingly consumers of the virtual world.
Think of the music industry where 15 years ago we walked into a music shop and browsed CD’s. Similarly, we used to book our holidays through a local travel agent. Less than 7 years ago, the world operated without hand held devices; yet it seems incomprehensible that we could live without them today.
In 1992, I applied for a bank loan, which involved completing a 5-page application form in black legible capitalised letters, appending financial documents and waiting 4 – 6 weeks for the answer. Over subsequent years I‘ve applied for loans, and surprisingly the process has not really changed. More often than not, the Bank wanted my home as collateral.
A Viacom Survey [i] showed that many millennials are ready to give up on banks with more than 33% not believing they will need a bank at all and some 70% preferring a visit to the dentist than listen to what the banks are saying.
A recent McKinsey Study revealed that some 70% of global banks stayed the same on a cost efficiency ratio despite leaps forward in mobile technology, cloud computing and web platforms.
When an industry is unloved and inefficient, faced with the twin forces of increasing regulation and new technology, disruption is imminent. There will be more change in the financial services industry in the next 5 years than the last 50 years. Globally, a new cohort of companies is innovating the financial services space across all types of transactions – payments, wealth management, personal investing, loans, insurance and equity capital raising.
I have been a loyal customer of my bank since 1992, I expect they know my spending habits, my income and my assets. Am I expecting too much when I want a bank that provides electronic identification, prepopulated application forms, an online friendly user experience, a credit decision in minutes, electronic documentation and funds in my account in less than 24 hours? Do I have unrealistic expectations?
Well apparently not. There are in excess of 100 fintech organisations globally providing these benefits to clients in countries around the world, yet just a handful of global banks could provide this full end-to-end experience online.
Banjo will provide this service to small business customers in Australia.
Projecting ahead to 2025, the ‘digital natives’ (Gen Y and Z) and the digitally savvy (Gen Z) will continue to drive this shifting landscape of activities, moving out of the banking system and new technology, expanding the pie in markets historically underserved by banks. The traditional model will continue to be challenged and broken. The consumer is driving the demand for new business models; not Silicon Valley. The digital transformation has client needs at the forefront of design and implementation.
With marketplace lending moving mainstream, there are opportunities for Banks, Regulators, Government and Small Business Councils to work proactively with the fintech industry to improve services and access to finance for all small business owners.
If bank lending hasn’t changed since before the internet, then it’s time we changed it.
[i] www.millennialdisruptionindex.com
Banjo recently hosted a webinar on practical ways to improve your business’ Cash Conversion Cycle. AJ Singh from ezyCollect joined us to talk about their product. However, this article discusses the practical things any business can do, regardless of which product or solution is used.
The Cash Conversion Cycle (CCC) is the capacity of a company to turn its goods and services to cash. It’s calculated by a simple formula of length of time, measured in days, for a company to convert the investments and assets in its inventory into cash generated from sales. The shorter the CCC the better.
If you are unsure what your CCC is in terms of inventory, debtor and creditor days, you can easily learn the method to calculate CCC by following steps described in The Balance. Or discuss with your accountant or advisor.
Banjo’s Andrew Colliver said that if your business is currently doing it tough, there are three basic strategies to employ:
Much of the second point – improving business processes – is about reducing your CCC, and getting your inventory days down. A benchmarking survey by global consulting firm PwC found the average CCC for large corporations is 37 days, while for small business it is 84 days.
How can you get that average of 84 days down to something more manageable? AJ Singh said that while there’s no silver bullet, improving your CCC is about doing many small things beautifully. Key to this is assessing the risk of your customers.
You will need access to data that will enable you to make assessments of your customers based on facts, such as their credit behaviour. Companies like ezyCollect work with credit reporting bureaux such as ilion or Dun and Bradstreet, to access data on each Australian company and calculate their risk level.
Having done a risk assessment of your customers, don’t set and forget. Continue to assess the risk regularly, and use the actionable insights gained from that assessment.
Another tactic is to get smarter with options for your customers to pay you. Data shows there is a trend to customers paying by credit card online, after 5pm. To serve this, give them one or two click options in payment methods, for example by including a Pay Now button in your email. This helps take away the friction from the process, making it easier to get paid.
According to AJ, research has shown that 30-40% of customers pay on the first 2 ‘nudges’ or reminders. The remaining 60% pay following a phone call (the 3rd or subsequent nudge). The data shows that calling is necessary and it works – so allocate time and resources to that.
At the same time it’s important to communicate with customers in a human and empathetic way. Customise the email or SMS messages you send to customers who are behind in payments. Ensure you send a message of thanks when they do pay.
According to AJ, even if a customer is going through a difficult period, it doesn’t necessarily mean you should stop working with them. It’s important to understand who the customer is, and if they are otherwise reliable, work with them on a payment plan.
Improving your CCC is an important next step in your business. If you can reduce your debtor days by as little as 10 – say from 84 to 74, this can improve your net cash position quite dramatically. You can do more in your business with that money, and gain access to more working capital.
For Banjo clients, one month’s free trial of ezyCollect is available. Contact Jason Gatt on 0434 019 725.
In recent times, many businesses have told us a similar story. Having adjusted and refined their business’ operating model based on their experiences and insights, they were seeing their best sales and profit margins in years. Then came March 2020, and the impacts of COVID-19 swept away a quarter of business momentum.
Those businesses, while still viable, are now struggling to break through a plateau. The year on year sales are consistently the same; the business owner feels wealthy on paper, yet with little in the bank account. A typical quote would be “I’m selling $500,000 per month, but I can’t afford to hire people or expand, because all of my profits are tied up in inventory. I am not even paying myself”.
The goal of any business owner is to reinvest profits into as many multipliers as possible - those business products, initiatives, or growth paths that have a high probability of growing the business with preferably low initial capital outlay.
Multipliers may include: advertising, building a customer database; research and development for new products; hiring more staff; software tools; testing new strategies, and new channels. All have a higher potential gross margin return on investment (GMROI), hence their suitability for profit reinvestment.
The predictable yet non-multiplier elements of your business like inventory can be funded using externally sourced capital. This will enable a business owner to manage delivery when required instead of paying warehouse storage costs in Customs.
All money has an interest rate and cost. Using money now to immediately reap revenue benefits is the clear opportunity benefit versus missing definite growth opportunities. Everything the business owner does is an allocation of available capital for a return.
In the below example, a loan of $100,000 allows the freed up capital of $85,000 to be directed multiplier projects such as hiring a new staff member, developing a new product, or exploiting a new advertising channel or funnel. Of course, the profit generated needs to exceed the $15,000 additional finance cost. If the owner achieves a higher profit, this is the classic GMROI arbitrage.
Use own profits After finance
Inventory order cost $100,000 $15, 000
Freed Up Capital - $85,000
Customs warehouse $7,000 -
Sales Potential $400,000 $400,000
Assumed Gross Profit $200,000 $200,000
Gross Margin ROI 186% 1333%
A recent live example we successfully worked with is a NSW based workwear, industrial sales, and PPE supplier with turnover of $8m. They borrowed $500,000 of funding for inventory to avoid customs warehouse storage costs of $700 per week, and to invest directly in multiplier initiatives.
By financing inventory using external capital, available profits were freed up to be reinvested in hiring a key National Sales Manager. The Sales Manager, with 15 years of experience in national sales distribution roles, was able to fulfil a pipeline of future customers in other states that the existing personnel did not have the capacity to crystallise. A new website, supported by radio advertising, was also launched in early July.
The business is on track to break through the $8m per annum sales plateau by expanding product penetration and reach into quality blue chip clients on a national basis.
By freeing profits from being tied up in inventory, and outsourcing the funding of stock, many other businesses could put themselves on a similar trajectory.
With metropolitan Melbourne again in lockdown in an attempt to stem the renewed outbreak of coronavirus, many residents and business owners are feeling frustrated and despondent. It has also been a stark reminder to the rest of the nation that we’re not out of the woods yet.
Feelings of anxiety, 'adjustment fatigue' and even exhaustion are very common at the moment. What’s also common, is sweeping these feelings under the rug until they become overwhelming.
The strong established links between good mental and physical health mean that body activity combined with simple, short mental practices will enable us to achieve a balanced approach that keeps our whole selves in good working order.
Mark Dean founder of En Masse, a workplace behavior change consulting firm, provides some simple but effective things everyone can do to de-stress and look after themselves:
In these difficult times, it could seem like a bit of a luxury to talk about the ethical culture of your business. You’re flat out trying to keep all the plates spinning, right? Most of us believe we are ethical – it’s basically about doing the right thing – but we feel we haven’t got time to sit and think about it.
In reality, ethics is not a lofty ivory tower concept, but is woven into every part of our lives. Ethical decisions – or the lack of them – are what get us all talking about sport, politics and reality TV. They are also present in our relationships and our businesses.
In the Governance Institute of Australia’s most recent 2019 Ethics Index, 54% of Australians surveyed said that they had personally faced an ethical dilemma.
Interestingly, having faced that dilemma and made a decision, more than one in four (27%) said that they would now change that decision. The most common reason for the desire to change the decision was that hindsight allowed them to see it differently now. The second most common reason was not having enough information available at the time.
Regretting a decision in our business is something we all want to avoid. Establishing the right ethical framework to run your company and help you make decisions that you can live with now and into the future could be a worthwhile investment of a little bit of time and thought.
According to The Ethics Centre, a strong ethical culture is essential to achieving something that strikes at the heart of every business owner – driving superior, long-term performance – driving behaviour, innovation, and every decision from hiring, through to partnerships and customer service.
The Ethics Centre’s new, free guide produced especially for SMEs goes beyond broad theory to offer practical, step-by-step guidance and tools to build a stronger, better business. It provides straightforward ways to define and apply your own Purpose, Values and Principles in your business.
Put simply, the Purpose defines why you are in business and what it was set up to achieve; Values are about what guide the business’ actions and behaviours; and Principles are how the business gets the things it thinks are good.
An ethical approach is there to enhance a business, not stifle it. It can give you a framework to help you not only define what your company is about, for yourself, your staff and customers; but also to help you to solve the inevitable dilemmas that come up in every business.
Whilst the unprecedented spread of the coronavirus around the world continues, businesses have been dealing with the disruption to their workforce, supply chains and projected cash flow. As the international scale of the pandemic progresses through the complex ecosystem of the global economy, business leaders are working with their accountants to proactively balance shielding against downside risks with readiness for growth.
FINANCE AND CASH
Cash has always been king. Cash and headroom are critical as operations and output are impacted while staff and establishment outgoings remain fixed. Businesses can review all assumptions that feed into their cash flow projections, and run scenarios on profit and loss, balance sheet and cash flows with various degrees of interruption of how their businesses may be impacted. In many discussions with clients over the last 3 months, they have mentioned their accountants advising them to collect debtors as quickly possible, be careful offering credit and deploy available inventory on the floor. Sound advice around 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. Some excellent initiatives implemented over recent weeks:
SUPPLY CHAIN
Businesses need to review upstream and downstream to identify where the vulnerabilities are. The impact on supply chains was highlighted from the shut-down in China, but as that disruption expands across the world, some of its impact on businesses is yet to be felt depending on lead times and component stocks. Business should factor in contingencies around their specific supply chain as port and container backlogs are slowly cleared, particularly on seasonal stock.
FORECASTING DEMAND
In Australia, seasonal businesses will be significantly impacted if the disruption period has coincided with lower demand, leaving inefficiencies such as over-capacity or excess stock. It makes perfect commercial sense to review inputs to avoid having fixed commitments and outgoings should turnover be significantly reduced. Mitigating actions that could be pursued include taking more flexible arrangements on purchases should they need to be reduced or returned and considering government support programs available for reduction in staff hours, salaries or headcount.
Businesses must expect that their customers will be looking for this same flexibility of arrangements as they in turn look to mitigate their exposure. Businesses that deal in B2C markets should expect that as consumer sentiment drops, their customers may wish to postpone large financial commitments and purchases, and will be reluctant to commit to events that they are unsure will go ahead. As consumers behave differently during a disruptive period, such as avoiding gatherings or working from home, this should be factored into projected demand.
Those serving B2B markets need to also look through their customer to the ultimate end users to really understand how they are exposed and where they may need support. Businesses need to work through impacts in relation to sales pipeline, stock and receiving payment, whilst maintaining existing customer relationships.
SERVICE DELIVERY MODELS
Critical activities, key customers and core people will be identified through organisational business impact assessment. Alternative service delivery options should be explored, for example home delivery or in-home services and online delivery platforms, and how this could be serviced by redeployment of current staff. Management will need to ensure that they understand the terms and conditions of employee contracts and agree how they wish to engage with their workforce should this arise. Businesses may need to contract and engage additional or alternative staff or suppliers in the event that their regular workforce is unavailable.
Australia has built an enviable response in cushioning the impact of COVD-19, and we can look forward with some optimism. The primary focus of Government to date has been to minimise the costs of the crisis to Australian SMEs, and as we look forward, the Government will shift focus to deregulation, productivity measures and reward expansion/development activities through tax incentives.
