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SMEs urgently seek cash flow advice

Cash-strapped small businesses are suffering revenue shortages but still have bills to pay. INPRACTICE talks to two practitioners about how they are advising clients in financial difficulty.

Derek Parker | September 2020

A great irony of the COVID-19 environment is that while many businesses struggle to stay afloat, most accounting practices have never been busier.

Public practitioners are working hard to provide advice, lodge applications for government support, and set out the best options for the future of their small business clients.

Many CPAs have reduced their fees. Although this may help to facilitate positive relations in the long term, it can in the short term negatively impact their bottom line.

The core issue for the majority of SMEs is cash flow. Revenue has dramatically reduced but there are still bills to pay (although banks and the Australian Taxation Office [ATO] have taken steps to reduce the pressure).

Cash flow has often been a problem for SMEs, but the COVID-19 pandemic has taken it to a new level.

“We have been emphasising the importance of cash flow to our clients for a long time, and most of them have got the message,” says Knight Partners principal Peter Knight FCPA.

“When the crisis hit, some companies – children’s play centres, coffee shops and gyms, for example – felt it immediately. Some had reserves so they could hang on for a while. For the rest, it hit progressively over the next 30 to 60 days,” Knight says.

BDO Australia head of strategic innovation Tanya Titman FCPA agrees that the crisis has thrown cash management into stark relief.

“Cash flow forecasting was often put in the ‘too hard’ category,” Titman says. “Now it is very much front of mind. However, many businesses lack the knowledge and tools to be able to effectively do it”

Transitioning to the ‘new normal’

When COVID-19 crisis erupted in March this year, many SME principals took the view that it would last only weeks or, at worst, a few months.

Once it was clear this was not going to be the case, it became a matter of business survival until the provision of government financial support. Initial strategies were cost reduction and accessing reserves, but these were only ever going to be temporary solutions.

“Our experience was that smaller businesses without big overheads have generally been able to adapt more easily than those with costs such as a physical office or retail space, and many staff on the payroll,” Titman says.

“Those who were able to adapt their business model have found new revenue streams and are making a transition to [what is now known as] the ‘new normal’.”

JobKeeper and cash flow boost save the day

Knight saw a similar pattern, although says some industry sectors – especially those connected to tourism or involved in small retail – have had a very hard time.

He is quick to recognise the importance of initiatives like the PAYG cash flow boost and JobKeeper in providing enough cash for certain businesses to stay afloat.

He notes that CPAs have been able to help clients take advantage of federal and state government incentives to maintain cash flow.

Practitioners can also speak on their behalf to financiers for relief from loan or lease repayments, investment property loans, and residential home loans.

Depending on their situation, many CPAs have also been able to advise on how to take advantage of historically low interest rates.

Titman points out that the extension of JobKeeper, originally slated to end in September 2020, has been met with great relief in the business community, creating some cash flow breathing space and a measure of certainty.

“Businesses have moved from cash flow management based on the money in their bank accounts to understanding that they need a forecasting model to show weekly cash flow projections,” she adds.

“Through webinars and workshops, we are seeking to educate businesses on using simple tools to provide a 12-week cash flow forecast. They need a clear understanding of what the future looks like and how long the cash is going to last.”

Spend smarter to retain business focus

In July there was some evidence the business environment was stabilising. Unfortunately, the Victoria State Government was then forced to impose Stage 4 lockdown restrictions, which was a huge blow.

“We have clients around Australia and they are all talking about Victoria and the likely knock-on effect,” Knight says.

“There is a bit of a sense of panic again. It just underlines how volatile and uncertain the situation remains.”

He believes many companies have again gone into survival mode, cutting all spending, but that this is not necessarily the right strategy.

“You need to keep up the marketing spend,” he insists. “We encourage our clients to keep marketing to maintain their profile.

“Many have moved to more online marketing and taken control of promotional work themselves instead of outsourcing. Good cash flow management does not simply mean not spending. It can mean spending smarter.”

The reality, however, is that many SMEs are likely to close, especially if the crisis extends into 2021. Businesses dependent on “life support” government assistance are especially vulnerable. Business closure is not a negative – it opens up new opportunities for the owner and reduces the very real risk to the owner of trading while insolvent.

For practitioners who identify some early warning signs of a client in difficulty, it is in the client’s best interest for the practitioner to initiate a conversation around exiting or restructuring their business.

The earlier a practitioner can begin to help their client with an exit or restructuring, the greater the range of options that are available to the client and the more likely they will get the best possible value from selling their business.

Hanging on and hoping for the best does not save a business and eventually leads to decisions about the future of a business being taken out of the hands of the owner.

Likewise, Titman argues for a proactive approach rather than waiting for a return to “business as normal”.

“COVID-19 has forced businesses to operate more efficiently, carve out the fat and take a closer look at their numbers,” she says.

“It is unfortunate that it has taken a crisis for some businesses to realise how important cash flow is. I regret to say that for some it will be too late.”

5 cash flow tips for SMEs

  • Pay attention to cash flow as a key indicator of business health. 
  • Maintain some cash reserve in offset accounts set against loans.
  • Reduce debt as much as possible and look for the benefits of low interest rates.
  • Perform appropriate checks when offering credit.
  • If cash flow forecasts show continued difficulty, seek professional advice quickly.