Business Cashflow Finance Australia:What Is Causing the Gap?

Before You Ask for More Finance, Find the Cashflow Problem.

Why Is Your Business Actually Short of Cash? When a business runs short of cash, the natural reaction is often:

We need more finance.

Sometimes that is exactly right.

But before I start looking for a lender or recommending a finance product, I want to understand something more important:

What created the cashflow gap in the first place?

Because a business that needs $500,000 due to rapid growth has a very different problem from a business that needs $500,000 because it has been making losses for the past year.

The amount required may be identical. The appropriate solution may be completely different.

This is why I believe the first step in business finance should be diagnosis, not product selection.

If you do not understand what caused the shortage, there is a risk that new finance simply adds another repayment without fixing the underlying issue.

Is the Cashflow Gap Caused by Timing, Growth or Something Else?

The first thing I look at is whether the cash shortage is temporary or permanent.

A temporary working capital gap can occur in an otherwise healthy business.

For example, customers may pay in 60 days while suppliers require payment in 30. The business makes a profit on the sale, but somebody has to fund the 30-day gap. That may be a genuine working capital requirement.

For businesses with a substantial debtor ledger, receivables finance may help convert unpaid invoices into available cash sooner.

An importer may have a different timing problem. The supplier may require payment before goods leave overseas, while the Australian customer may not pay until weeks after those goods arrive and are sold.

In that situation, trade finance may be more closely matched to the underlying cash cycle.

Growth can create another type of cashflow gap.

A business winning larger contracts may need more stock, additional employees, higher freight costs or greater production capacity before receiving the additional customer cash.

The business can therefore be profitable and growing while still needing more finance. That is very different from a business borrowing because normal operating expenses consistently exceed the cash being generated.

Understanding which situation you are dealing with matters.

What Are the Main Causes of Business Cashflow Pressure?

When reviewing a funding requirement, I generally want to understand several areas.

Debtors

Are customers paying according to agreed terms? Or is 30 days becoming 45, and 60 days becoming 75?

A growing debtor ledger can absorb a significant amount of cash. If annual turnover is increasing, even unchanged payment terms can create a larger working capital requirement because there is simply more money outstanding at any point in time.

Inventory

Has the business increased stock levels? That may be deliberate because sales are increasing or supply chains require larger forward orders. But slow-moving or excess stock can also quietly consume cash.

Inventory may be an asset on the balance sheet, but it cannot pay wages until it is sold and the resulting invoice is collected.

Work in progress

Manufacturers, construction businesses and project-based businesses may spend substantial amounts on labour and materials before reaching the next billing milestone. That money can remain tied up for weeks or months.

Tax

ATO debt can sometimes be a symptom rather than the underlying problem.

Perhaps the business used money set aside for GST or PAYG to meet wages or suppliers during a tight period. If that happens once, there may be an identifiable event behind it. If tax liabilities continually rebuild, I want to understand why.

I have covered this issue further in ATO Debt vs Business Loan for Australian Business Owners and ATO Tax Debt in Australia? Better Business Funding Options.

Existing debt repayments

A business may already have several facilities. Equipment finance, property debt, an overdraft, short-term loans and tax repayments can all compete for the same cash.

The business may not necessarily need more debt. It may need the existing debt structured differently.

That is why reviewing the whole funding structure can be just as important as looking at the immediate cash shortage.

When Is More Business Finance the Wrong Answer?

Finance can solve many genuine business problems. But it cannot solve every problem.

If the business is continually borrowing to pay normal operating expenses because gross margins are too low, more debt may only delay the issue. The same applies if the business regularly needs another short-term loan shortly after the previous one was repaid.

A transport client of mine is a good example.

They came to me believing the answer was to extend their existing facility limits. Cash was tight, and increasing the limit seemed like the obvious fix.

But when we looked at what was actually causing the pressure, two things stood out, and neither of them was a finance problem.

The first was fuel. They were paying more than they needed to for it, particularly painful during a period when fuel prices spiked hard. After some negotiation, we found an alternative supplier offering a materially better rate, a saving that flowed straight through to the business's cashflow without touching a single facility.

The second was how the business managed its debtors. Credit terms had drifted, customers were paying later and later without anyone tightening the response, and the business had never really enforced a collection process. We put a proper credit policy in place, tightened collection activity and reduced credit limits for customers who kept drifting out on payment terms.

Between the two changes, debtor days came down and cash came back into the business faster, without adding a dollar of new debt.

The facility increase they originally wanted would not have fixed either problem. It would have covered the symptom for a while and left the actual cost sitting there, still bleeding cash every month.

I would want to know what keeps recreating a shortage like that.

Is the business underpricing its work? Are overheads too high? Are directors drawing more cash than the business can support? Has a major customer been lost? Has stock stopped turning? Are tax obligations accumulating because the business cannot fund current liabilities?

Those are business issues before they are finance issues.

That does not mean finance cannot form part of the solution. A fundamentally sound business may need additional time and liquidity while changes are implemented. But the funding needs to sit alongside the solution rather than replace it.

I have also written previously about why businesses can still be declined for finance even when the underlying situation deserves a closer look: Why Australian Businesses Still Get Told No for Finance.

The quality of the finance application improves substantially when the business can clearly explain what created the funding requirement and what will prevent the same problem recurring.

What Should You Work Out Before Applying for More Finance?

Before approaching a lender, I would want answers to five questions.

1. How much cash is actually required?

Not a rough estimate and not simply “as much as we can get”. Work out the real requirement.

2. What created the shortage?

Debtors? Inventory? Growth? Tax? Equipment? A one-off event? Continuing losses?

3. Is the problem temporary or permanent?

A three-month timing gap requires a different structure from a permanent increase in working capital.

4. How will the money return to the business?

If the finance funds stock, when will that stock sell? If it funds debtors, when will customers pay? If it funds expansion, when will the new operation generate cash?

5. What repays the finance?

This is one of the questions the lender will ultimately ask too. Being able to answer it before approaching the lender puts the business in a much stronger position.

The objective should not simply be to obtain approval. It should be to put in place finance that actually matches the problem being solved.

Do not start with “What loan can I get?”

Start with: “Why does the business need the money?”

Once you can answer that properly, the right finance structure often becomes much clearer.

Talk to Pfitz Financial

If your business needs additional finance, the first step should be understanding exactly what is creating the cashflow requirement.

At Pfitz Financial, I combine over 30 years of commercial finance experience with practical business consulting to help Australian business owners identify what is driving their funding needs before approaching a lender.

That means looking at debtors, inventory, work in progress, tax, existing debt, growth and the way cash actually moves through the business.

The answer isn't always more finance. Sometimes it's a different type of finance. Sometimes it's addressing another issue in the business before borrowing at all.

If your business is experiencing cashflow pressure and you want to understand what is really driving it, contact Pfitz Financial or book an appointment online for an experienced second set of eyes over your business and funding structure.