19 Sep 2017
Protecting your small business cash flow

Protecting your small business cash flow

In any business, cash is king. But many small businesses in Australia struggle with cash flow management.

The number one cause of failed SMEs for three years running was inadequate cash flow, according to the 2016 Australian Securities and Investment Commission (ASIC) corporate insolvencies report.

So what can you do to improve your cash capital?

Know your financial forecast

Having a strong grasp on the financial forecast of your business means you’re better placed to make decisions throughout the year if there are any shortages or surpluses in cash.

Most businesses forecast their cash flow annually and calculate their outgoing expenses per month.

It’s critical to continually check your cash inflow and outflow every month to see if your forecast is on track.

Protect your credit

A business can become vulnerable to bad debts when they sell goods and services on credit terms.

It’s common practice for commercial buyers to ask for an account or credit terms when making a purchase from a business, but delayed payment or even non-payment can create additional stress with many consequences.

QBE National Relationship Manager Trade Credit & Surety, Aidan Quinn, said this practice can put a business in a risky position.

“You’ll often see businesses provide goods or perform a service without immediately receiving payment. Add into that the risk of having a buyer, or several buyers, settle their accounts late. Or even have the possibility of not receiving payment at all, may end up leaving a business in an uncertain financial position,” he explained.

“A small to mid-sized business may be operating with very fine margins where they don’t have the financial backing to continue to survive if a buyer delays payment – let alone if they don’t receive payment at all.”

According to Quinn, Trade Credit insurance can provide protection for small to mid-sized businesses who may be suffering from restricted cash flow.

Examples of when cash flow can become stretched would be a sudden increase in demand for goods/services due to seasonal peaks if the business is trying to grow rapidly either through organic growth or exploring new markets.

“Or perhaps a scenario where the business is over-reliant on one large buyer who suddenly becomes unable to pay their debts due to unforeseen circumstances,” he explained.

Understand the risk of credit terms

Trade Credit insurance can help provide the security needed to give a business confidence in their operating decisions.

To decide if credit insurance is appropriate, Quinn says business owners should consider what the risk is when offering credit terms to buyers.

“You need to consider what level of loss you are prepared to endure in the event of a bad debt such as whether you need catastrophic cover if your largest buyer falls over, if you need to strengthen your balance sheet and protect the business profits, or you may simply be taking on new risks that are increasing your existing exposures.”

“Other factors to consider is that a financier, such as a bank, would be more comfortable providing funding to the business if the debt was secured or if the business had a bad debt provision, it could be replaced in the balance sheet with a trade credit policy,” Quinn added.

Trade Credit insurance offers support to businesses throughout the whole buyer relationship cycle.

“That is, QBE will provide opinions to our customers on the credit worthiness of their buyers by agreeing to credit limits,” Quinn explained.

“For example, we will advise of adverse information discovered if things like a negative media article is published on a buyer or the buyer’s payment pattern begins to change.”

If the relationship between the business and a buyer turns sour, insurers can also assist with any payment renegotiations with that buyer or help facilitate the pursuit of the debt.

Manage your debtors’ accounts

“There are many ways that a business can best manage their accounts, but first they need to have a good understanding of their buyers and then set up tight credit policies,” Quinn said.

“Managing debtor accounts will be critical for cash flow control for their business.”

Talk to an expert broker

As business insurance experts, brokers can find the policies that best meet your business needs. How do they work? They’re best described as licensed individuals or firms that serve as intermediaries between insurers and business owners to negotiate insurance policy contracts.

Brokers are often viewed as professional trusted advisors and can offer strategic risk management for business. They can also help business owners who operate in niche sectors with specialised insurance needs that might not be included in a standard business insurance package, for example, bed and breakfasts or 24-hour convenience stores. So how do you find a good one?

How to buy business insurance

Business insurance is bought through brokers. If you don’t have a reliable personal recommendation, the National Insurance Brokers Association (NIBA)* can help you find an accredited broker.

When you’re choosing a broker it’s wise to check their credentials and determine whether they’ll be a good fit for you.

QBE’s Small Business Pack^ is available direct to a range of small to medium businesses, including trades, hospitality, retail and professional services. If you know what you need and are ready to buy, you can apply for the Small Business Pack online.

If your business risks are a little complex or you’d prefer an expert to take care of your insurance needs on your behalf, you may prefer to contact a broker. If you don’t have a reliable recommendation, the National Insurance Broker Association (NIBA)* can help you find an accredited broker.

Get a QBE Small Business Insurance Pack quote

Related article: Using a broker versus going direct

*The brokers on this site are not employees or agents of QBE, but are independent entities. QBE is not responsible for any advice provided to you by any broker on this site. Any such advice is the responsibility of the broker concerned.

^This is the QBE Business Pack Policy Wording (QM163).

This advice is general in nature and has been prepared without taking into account your objectives, financial situation or needs and may not be right for you. You must decide whether or not it is appropriate, in light of your own circumstances, to act on this advice. To decide if QBE’s products are right for you, please ensure you obtain and consider the Policy Wording or Product Disclosure Statements and Target Market Determinations, available online at QBE.com/au. Insurance issued and underwritten by QBE Insurance (Australia) Limited (ABN 78 003 191 035, AFSL 239545).

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