Avoid a cash flow crunch

Avoid a cash flow crunch article image

It is a truism that many otherwise profitable businesses fail because they run out of cash. While profit is the reason you're in business, cash flow is what keeps you there-and cash flow and profit are two different things. You may be making profitable sales, but your business can still suffer if those sales aren’t being converted quickly enough into money in the bank. In fact, it's not uncommon for businesses to fail when demand for their products is hottest. That's because a rapidly expandingbusiness also has rapidly expanding expenses, while the income from those new sales can take time to land in your bank account. Unfortunately, the danger is greater for exporters than for almost any other kind of business. Even if you have an established business, exporting can stretch your finances to the limit, simply because it takes so much longer to transport your goods to market, clear them through customs, and get them into the hands of your distributor or customer. Depending on your payment terms and shipping arrangements, that can open up a sizeable cash flow gap thanks to the time lag between paying for supplies and getting paid by your customer. Then there are the effects of unexpected economic fluctuations, like changing interest rates, unpredictable commodity prices and volatile foreign exchange rates. Without hedging, a sudden spike in the value of the dollar can turn a profit into a loss. All of which makes it essential to put protection in place, so that you never have to suffer a cash flow crunch.

The cash flow cycle

A good starting point is to think about how cash flows into and around your business, then consider how you can get it moving faster. You've probably heard of the cash flow cycle, which starts with the cash you invest in your business or earn from sales. You spend that money on business inputs, including salaries, rent, supplies, marketing, whatever you need to keep your business running and get your product out the door.

Next come sales, but that isn't the end of the process. Unless you're paid cash upfront, your sales go into accounts receivable, while you're waiting for the money to arrive. It's only once you've been paid that they go into cash and you're ready to start spending again. The important point is this: every dollar you invest in your business has to go all the way around the cash flow cycle before it comes back to you, bringing some profit with it. So the faster you can make the cycle turn, the more successful your business will be. A long cash flow cycle not only means you have to wait longer before making a profit, and even longer before making a profit on your profits, it also means you need to have more capital tied up in your business, so that you can keep things running until the cash comes in. If you have borrowings, it's the direct interest cost; if you're lucky enough to be debt free, it's the indirect opportunity cost of not being able to invest that money in something else, like growing your business.

Now you begin to see why exporters face a unique set of challenges. Not only is your cash flow cycle likely to be longer than that of most other businesses, you may also face more uncertainty, both in the time it takes to deliver the goods and get paid, and in the variability of all those other factors that influence your costs and your revenues.

Speeding up the cycle

The next step is to get the basics right by taking control of each stage of the cycle. Here are a few tips to get you started. Managing cash: Create a detailed cash flow forecast, then analyse the capital needs of your business. Consider putting a safety net in place by using export finance to bridge the cash flow gap. Managing business inputs: Negotiate better payment terms with key suppliers, or ask for a discount for prompt payment. Forecast your future production needs and buy raw materials just in time, delaying expenditure. Protect yourself against the risk of delayed delivery or non-delivery of goods from overseas suppliers by selecting the right payment method. Managing sales: Set your prices to maximise profit, not sales. Make sure you take into account all of the costs of doing business, including overheads, administrative costs, and the cost of accessing working capital. Managing accounts receivable: Carefully track the average number of days it takes for accounts receivable to be paid, then work to reduce that number. Negotiate shorter terms of trade with key customers, and make sure they understand your terms; again, the payment method you agree with your overseas customers is crucial. For exporters, the payment method you choose not only influences when you get paid, it also determines who carries the risk of the transaction. As an exporter, the ideal solution is to be paid in advance by international money transfer. For that to happen, you either need to have a unique product, a powerful competitive advantage, or a strong relationship of trust with your overseas customers or distributors. Unfortunately, for most businesses, that is not always the case. That's when you need to start looking for alternatives that provide security to both you and your customers. A documentary credit can be attractive option, especially when dealing with new and unproven customers. It gives you a high degree of security that you'll be paid promptly, with payment guaranteed by the buyer’s bank after the goods have been shipped. For more established customers, documentary collection can also work well, although payment can take a little longer. With documentary collection, you ship the goods, then send the shipping documents to the buyer’s bank via your own bank. The bank releases the documents to the buyer when they have fulfilled the conditions, usually by making an immediate payment or promising a future payment. The documents give the buyer title to the goods. All of these solutions have their pros and cons; often it's a question of choosing the right solution for each customer, or even each shipment. A trade finance specialist can give you more information about your options and help you make the right choice for your individual circumstances.

Click for full size table

Bridging the cash flow gap

Almost every business needs a little extra cash from time to time, especially when you're trying to bridge the gap between sending goods overseas and getting paid for them. That's when trade finance solutions really come into their own. Once again, there is a range of solutions to choose from, each tailored to a slightly different need. Here are some of the most popular: Trade advance: Short term finance for a particular transaction. Trade advances are generally available for periods of 30-180 days, so you can choose a term to match your cash flow cycle. Foreign bills negotiated: Designed for exporters who use documentary collection, foreign bills negotiated gives you finance when the goods are shipped. It’s usually available for terms up to 180 days, so you have almost six months breathing space for your buyer to pay. Without recourse export finance: Designed for exporters who use documentary credits, without recourse export finance gives you guaranteed payment as soon as the conditions of the documentary credit are met. Insured export finance: This is the maximum security option. Insured export finance gives you accelerated payment through a loan secured by a trade credit insurance policy. So even if your customer doesn't pay, your exposure is reduced. There's plenty to think about, and the issues are sometimes complex. That's why it can be a good idea to consult a trade finance specialist at your financial institution. -Sunil Aranha is the head of Trade Working Capital at the Commonwealth Bank ( and our Dynamic Export banking expert.


Leave A Comment

Spinning icon Saving your comment, please wait...
Spinning icon Saving your comment, please wait...