Any wholesaler or retailers understands how difficult cashflow can be to manage. However, in today’s market, the shortfall between paying for inventory items and recouping this capital through sales is growing. So what does this mean for Australia’s businesses, and what are their options?
A recent report published by Xero exposed a staggering 62% of small businesses faced a late or unpaid invoice. However, today’s cashflow problems go beyond this. In the current economic climate, wholesalers and retailers are being hit by a decline in the Aussie dollar and a recent trade war between China and the US.
In July 2018 Western Union currency strategist Steven Dooley and corporate hedging manager David Evans-Marcius discussed some of the challenges facing Australia’s retail and wholesale sector. They expressed their concerns with particular regard to the Australian dollar, which slumped by 5% on FX rates in June alone, placing immense pressure on small businesses.
So what is causing this sorry state of affairs? You may already be aware of some of the age-old causes of a cashflow gap. You may have experienced the challenges they pose yourself.
These include:
Many businesses are happy to let some of their profits slide rather than methodically collecting all receivables due. Many consider this simply to be an unavoidable cost of doing business. Don’t fall into this trap. Instead, make it your priority to receive the money you are due on every transaction.
For many retailers, the simple fact is, their outgoings especially property rent are too high while their volume is too low. Redressing this balance is a major step towards securing a healthier cashflow rate for your business.
David Finkel, writing for Inc.com in 2014, highlighted how many retailers are way off in their pricing. Finkel explained that the common reaction to a cashflow issue is to drive sales by dropping prices. However, if prices are too low, even an increase in sales is going to harm your returns as every item sold represents missed potential.
Businesses need funding in order to grow and to thrive in the market. Often, this funding and financing can be difficult to secure.
With Australia highly exposed to global trade and global trade expectations, growing tensions between the US and China have seen the AUD/USD lower. This has caused costs to rise for both retail and wholesale businesses.
As Evans-Marcius and Dooley explained, the international trade war is just one-factor causing problems for the AUD market here in Australia. Other factors weighing in the AUD include:
Unfortunately, none of these currency related factors look likely to change in the near future.
The above international trade factors have resulted in an FX spot rate at well below most businesses budgeted forecast. Budgeted rates need to be competitive and achievable in order to maintain a strong position in the market. As most SME wholesalers and retailers do not have the luxury of adjusting their budget rate, they may need to rely on “defensive hedging” to cut any losses and to afford protection for their business.
Defensive hedging – i.e. taking a hedge from a position of weakness – is not healthy for the sector, and is likely to prove to be a stop-gap move rather than a viable long-term solution.
In such turbulent times, finding an effective solution is vital. In this section, we will examine the effective methods for navigating this new retail landscape and for closing the yawning cashflow gap.
Never undersell your products. It is better to sell a reduced volume of products at close to their market value rather than desperately offload your inventory at a discounted rate.
Put a plan in place for maximising collections on all your receivables and for accelerating the process. Make sure invoices do not fall through the net.
This kind of streamlining may not always be possible, especially with very large retailers. However, trying to negotiate a reduction in your payment terms from 120 days to 90 days can hugely benefit your cashflow cycle.
Alternative lenders such as Banjo Loans can provide effective short-term funding to help you close the cashflow gap.
Rather than letting things turn sour with a supplier, consider negotiating extended terms while cashflow problems persist.
Businesses can reduce the risk posed by the dollar’s FX rate by;
By stepping up to the cashflow gap now, retailers can turn things around and thrive, even in today’s more challenging business climate. Next up in this series: The Cashflow Gap (Part 2): How retailers and wholesalers can reduce the gap by managing inventory.
Starved of credit?
At Banjo, we share in the vision of small businesses, we love hearing exciting business ideas and inspirational stories of business success. Most of all, we like to see people out there pursuing their passion. There are 2 million small businesses in Australia employing around 49% of workers and representing some 97% of all businesses in Australia. These stats make it clear that we all benefit if small business, the backbone of our economy, has the support and environment to develop and grow their businesses.
So we were perplexed that now, 7 years after the GFC, small businesses globally remain starved of credit and Australia is no different. One issue raised frequently in the small business sector is; ‘why is it so hard to get the funds we need to grow our business?’
Of 2 million SME’s (Small to Medium Enterprises) in Australia, 51% have no lending product at all and they are typically funded with family loans or credit cards at rates closer to 25% without generally adjusting pricing to reward lower risk borrowers.
Funding for SMEs globally has become constrained during the recession and stayed at these low levels since: it is generally more profitable for traditional lenders to make a $2m loan than a $50,000 one.
Post GFC traditional lenders have grown their personal and home loan credit books at much faster rates than their small business books. This has been attributed to a number of factors such as the relative riskiness of SME loans to housing loans, greater capital requirements for SME compared to other forms of lending and finally reduced competition amongst business loan providers post GFC.
Submissions to the recent Financial System Inquiry[i] stated structural issues such as information asymmetry, regulation burden and the taxation system also as possible contributing factors to the lack of business finance provision to SME’s.
There are a number of initiatives being implemented internationally aimed at addressing the same issues Australian SME’s face accessing finance, and we could consider some of these as roadmaps for our creation of a better SME world.
In the UK, high-growth businesses with low levels of fixed assets also have difficulty accessing credit. The UK Government launched a number of initiatives to support small businesses following a 2012 Parliamentary Review[ii] such as:
In the US, two initiatives in addition to those above caught our eye:
At Banjo, we take an active role in advocating for small businesses in Australia. SMEs are the job creators and innovators we need to keep the Australian economy growing.
Banjo introduces a new online marketplace lending platform built by Australian banking experts who simply thought there must be a better way to provide unsecured loans to SMEs. We want to make it easy so business owners can get on with what they do best!
Increased competition in Australia will be good for business.
Recent calls by the industry to reduce the red tape burden on SME’s by automating BAS and income tax returns are positive initiatives. We support the government task force working to explore the potential of technology and digital platforms joining with the Government to make it easier and more streamlined for businesses to interact.
Over the coming 12 months, the team at Banjo will place their shoulders on the wheel to work with Government, Industry Bodies and the Banking industry to explore ways in which we can all work together to create the right environment for small businesses to flourish in Australia.
Imagine being able to just get on with the business of running your business!
Sounds just brilliant to me.
[i] www.australiancentre.com.au
[ii] www.gov.uk/government/consultations/sme-finance-help-to-match-smes-rejected-for-finance-with-alternative-lenders/sme-f
