Managing cashflow pressures: Insights for small business

Garreth Hanley:
This is With Interest, a business, finance and accounting news podcast, brought to you by CPA Australia.

Richard Webb:
Welcome to CPA Australia's With Interest. I'm Richard Webb, CPA Australia's Superannuation Lead, and today we're talking about why cashflow planning has never been more important for small businesses. Small businesses are operating in a period of real uncertainty, from the upcoming introduction of payday super to volatile fuel prices and ongoing questions about where interest rates are heading.

Even for well-run businesses, these pressures can create cashflow challenges if they're not actively planned for. To unpack what this means in practice and how accountants and advisors can support their small business clients, I'm joined by two experts who see these issues every day.

Matthew Addison is executive director of the Institute of Certified Bookkeepers, representing bookkeepers on the ground and working closely with small businesses as they manage cashflow in real time. Welcome, Matthew, and thank you for coming in today.

Matthew Addison:
Greetings, Richard, and everybody listening.

Richard Webb:
And Gavan Ord is CPA Australia's Business and Investment Lead, and brings deep insight into the policy and economic pressures facing the small business community. Gavan, nice to have you here.

Gavan Ord:
Thanks, Richard, and thanks, Matthew, and great to be here today.

Richard Webb:
Today we'll walk through practical examples, common pitfalls, and some of the tools businesses can use to better manage cashflow in these times of uncertainty. We've been hearing a lot about cost pressures on small businesses, payday super, volatile fuel prices, and the prospect of interest rate increases. From your perspectives, why is cashflow planning such a critical issue right now for small businesses? I might start with you, Gavan.

Gavan Ord:
Yeah, thanks, Richard. So as you said in your intro, businesses are facing a spike in business cost, driven by fuel costs. And that's impacting not just fuel and transportation costs, it's running through the economy. Plus, there's the introduction to payday super, which you mentioned in introduction as well. On the other hand, we're also starting to see signs that consumer spending is pulling back.

So not only it's driven by costs, but also maybe less cash coming into the business. So what does this mean? So cashflow is tight and becoming tighter, and now's the time to actually more actively manage cashflow. If you don't actively manage cashflow, you're increasing the risks to the viability of your business.

Matthew Addison:
Richard, many businesses set up with a good idea. And even when they're 10 years in or 15 years in, it's the entrepreneurs, the business owners' good intentions of, "Hey, I can do something or I can sell something. I know what it is. I know what the market price is," and they just start doing. But we're in an era right now, whereas Gavan's alluded to, their prices are going up.

And what we see is business owners don't reconsider the price they sell at. They're too passionate about their customers. They look after their loyal constituents or clients, and they don't want to put the price up. But what we've got now is that price increase. Everything's going up, and the Council of Small Businesses surveys say that what small business owners do is they don't pay themselves or they pay themselves very irregularly. And some are reporting they're actually investing more money back into their business.

So this cashflow issue is one we just have to be realistic about. Your prices are going up. The only way you can realistically stay in business is you've got to consider putting your own prices up to try to keep the cashflow circulating in your business.

Gavan Ord:
Can I just add to that? Because I've been thinking about this issue and we've seen larger corporates increase their prices, but their pricing decisions are made remote from the customer. Whereas a small business operator, they're in front of the customers. It's really face-to-face.

I understand why the reluctance to increase prices because the person making the pricing decision is in fact right in front of the customer. So I can see why small businesses are more reluctant than larger businesses to put up prices. But as Matthew said, you've got to do it.

Matthew Addison:
That cup of coffee you used to sell at $5 as you walked into the cafe, Gavan, I'm now charging you $5.50. And direct to your point, you're eyeballing the customer and you've just hit them for some more money.

Richard Webb:
So that's a really important insight there. I think certainly pricing and how much businesses are paying the owners and the proprietors and the staff is something that definitely comes into this as well.

And I think going into the start of the new financial year, we're going to hear a lot more about the impact of payday super, and certainly it has received a lot of attention in the media due to the transition period, which could see businesses squeezed by the temporary potential double up in contributions.

But how do accountants and advisors help small businesses think about payday super as part of a broader cashflow story rather than a standalone compliance change, Matthew?

Matthew Addison:
Richard, you've opened up that issue that the conversation needs to happen. Because what we're still hearing from a percentage of the employer market, and it's about 30% with no proof behind that stat. But about 30% have not really grasped with the fact that on the 1st of July, they're going to pay some staff.

And previously the super would not have been paid for 118 days, and all of a sudden they need to pay it on the 1st of July. So there's a real cashflow disruption going up here. And you spoke of the double up, Richard, because we do have the June quarter has to be paid by the 28th of July, but the 1st of July paydays also got to be paid on the 1st of July. So you've got some overlap going on here. That cashflow discussion, a realistic cashflow discussion for business that said you work on a quite minimal float, a daily turnover that keeps you ticking, keeps you ticking happily.

Yes, you're even paying yourself out of it, but now we've got a couple of disruptions going on. We've talked about the fuel crisis disruption and the cost of input disruption. Now you've got a payday, it's just timing, but day 118 versus day one, that's significant timing. Where does that cash come from? The question I've been asking is, who are you not going to pay for 118 days?

So you pay your landlord every month, you pay your staff every week or every fortnight. You pay your electricity bills when they come in. Now, you've taken cash out of your business. You've had to pay it to your employee super funds, so how are you going to manage the other bills that you've got? The discussion needs to happen. The planning needs to happen.

Gavan Ord:
I know everything you said, you're exactly right, Matthew. And that 30% figure, I'm sure you're talking to your community and we're talking to members. I think that's about right. As you said, there's no actual evidence behind it, but there's a large portion that are on top of payday super, but there's this hardcore that are not.

And accountants really need to try and get to that hardcore, and bookkeepers need to try and get to that hardcore 30% because there are challenges. And you talk about doubling up, it's tripling up because as Matthew said, you've got fluctuations in pricing.

So you've got cashflow pressures elsewhere even before payday super comes in. So having that conversation now, so the impacts are as limited or mitigated as possible is important. And accountants and bookkeepers are really important to have that conversation. Because you get it wrong, there's challenges, particularly on penalties on super, which you can talk about the penalties on not paying a super.

Richard Webb:
I could talk about the penalties all day, Gavan. And certainly I might in another session, but let's make this practical though for our members with regards to cashflow more generally. Gavan, can you walk us through a simple example of how a small business might approach cashflow forecasting in uncertain times? It doesn't have to be technical, just something that accountants can walk through with their clients.

Gavan Ord:
Well, for our members, our community, bookkeepers and accountants, this is sort of everything they do every day. Starting cash balance, expect the cash inflows for the period, expect the cash outflows. In its most simplest form, but how often do you do this? And in times of difficulty, you should be doing it more regularly.

Ideally, a rolling cashflow forecasting would be great. That becomes more complicated, but a lot of the software can actually cope with that sort of stuff. But in terms of how you can improve cashflow, yes, you do more regular cashflow forecasting, but you do things like collect outstanding debts as quickly as you can. You can also push back when you pay creditors, but I would suggest continue to be a good customer because don't push the relationship too much. So use your terms of trade. You can skew your promotions toward products or services that can be turned into cash more quickly.

And also, you can sell obsolete stock or stock that's sort of taking up a lot of space, but don't just sell it for anything. Try to keep a margin in there. Also, try and seek finance if you need that finance, but challenge those assumptions all the way along. Don't just think, "Oh, let's extend the lines of credit." Challenge that. Is that the right approach for the business or can you improve cashflow through other means rather than extending your lines of credit or seeking external finance?

Matthew Addison:
Many different sorts of spreadsheets exist around trying to do cashflow planning, and you can get bogged down in the science of it and make it really quite complex. One of the simple ones we talk about bookkeepers do is look how much cash is in the bank. When does that run out? If nothing else came in, when would you have no money left to pay bills?

And that just allows a business owner to sort of focus on, okay, I need to keep the sales happening, and I need to not have discretionary spending going on. That extra little thing that is not core to the business, maybe I've got to hold that decision for a little while. Gavan alluded to dealing with the suppliers. You don't want to push your creditors off.

You don't want to burn those relationships, but at the same time, it might be a time you've got to have a realistic discussion with some of your suppliers and go, "Look, we are really suffering on our margin. I'm sure you are suffering on yours. Is there anything we can do about our pricing? Is there anything we can do on our terms of trade?"

And for those businesses that sell to larger businesses or sell to other businesses, it's again, having a conversation about, look, we might have a contracted price, but I've got to tell you, our margin is now zip. We need either to cover our costs. Can we renegotiate the price? Even if we look at the next two months, the next three months, renegotiate the price, renegotiate if there's shipping fees or transport fees.

Also talking about, look, we know we're normally on 15 days or 30 days, or I still hear cases of 60, 90 and longer payment plans. Guys, we need you to pay us a lot earlier. And without putting myself too much into the unfavourable category, we hear some large businesses certainly have the ability to pay their smaller businesses earlier, and it would be great if they would do that at this time.

Richard Webb:
So there's definitely a conflict there, isn't there, Matthew? There's the conflict between, I suppose, us going out to, or businesses rather going out to their suppliers and saying, "Can we extend the terms of trade there a little bit," while at the same time maybe looking at the customers that we sell to and possibly bringing those times in? And if everyone's going to be doing that across the board, it could make it very tricky, couldn't it, in order to actually make those two sort of things coincide?

Matthew Addison:
It absolutely conflicts, Richard. Yeah, you've called it out. But what we have, again, is a business environment in Australia. We have people that are passionately in business. They want to be in business. They want to do the right things both by their supply chain, so who they buy from and who they sell to.

And so constant conversation, but we've been in this time before where things are tough, the cost is going up, we need to be realistic. I would much prefer businesses are not closing the door because times are tough. So how do we keep the door open? We've got to have these conversations, and we've got to consider putting our prices up.

Gavan Ord:
I think it shows the importance of good business relationships all the way through. You don't want to get to a situation and then start to push the boundaries, "Oh, can we extend the terms of trade or can you pay earlier?" If you're a good customer, if you're a good supplier all the way through, you're more likely to get people to go, "Okay, yes, we'll help you out of this period." So always try to build and maintain good relationships with your customers regardless of the economic situation.

Richard Webb:
So it's a real balancing act that we've got there, but I also heard from you before too, Gavan, about financing arrangements and how important they are. And from you, Matthew, of course, the importance of having enough cash in the accounts to cover expenses as and when they fall due. And of course, one lever that businesses can pull when they're actually considering how to approach cashflow in the future is their financing arrangements. So what is it that accountants should be encouraging small businesses to think about when it comes to debt, overdrafts, and lines of credit in uncertain times? Matthew, I might get your thoughts on this to begin with.

Matthew Addison:
Look, let's take the rabbit out of the hat, but let's talk about, please don't use the tax office as your first line of finance. Tax office, as we know, prior to this fuel crisis and prior to the current era we're in, really have gone our debt book, businesses or taxpayers owing the tax office, it's too high.

And the tax office are not there to be a bank, and so we need to pay them. But having said that, tax office right now have come out with some approaches to saying, "Okay, you've got a debt, but let's talk about it. Let's put an appropriate payment plan in place if that's needed." Coming to your other financiers, Richard, really pleased to hear that the main lenders, call it the big banks, actually also having a positive approach to supporting small business during this time. So we would encourage the advisors, the accountants, bookkeepers, and the businesses themselves, talk to your bank.

Now, if the first answer is, "Oh no, we don't think so," have another conversation and go up the tree. Because in my role, I'm sure in CPA's role, you have this discussion with the execs of the banks, and their philosophy is to support Australian business. And so their message to the branches and the lending managers is consider the business and work with them to continue forward. So it's again, Richard, you've called it out a couple of times. Have conversations and be realistic, but have conversations. Am I reading the tea leaves the right way, Gavan?

Gavan Ord:
Absolutely. I mean, yeah, have the conversation, but also have the conversation early. Don't wait until you're actually really in trouble. And this is always the case with bank lending, external lending is, you do your forecasting, you identify what you need the money for and when, and go early.

Because banks will lend to you if you are prepared and you've got all the documents in front of you or more likely to land, sorry, rather than you're in trouble. So use your forecasting, identify when you need the money and go early. And by going early, it gives you options because you can also go to other lenders as well.

I will say, and Matthew's right, exactly on the ATO, don't treat them as a bank for first resort. They shouldn't be there. And this has come up in the Council Small Business, is that we are seeing some early signs of some very expensive lending starting to reemerge.

So for accountants or bookkeepers listening, just remind their clients if something's too good to be true, it often is. And speak to them about some of the lending conditions, the interest rates and the terms, the tenor of the loan before they enter into those arrangements.

Richard Webb:
So don't go straight into payday lending arrangements or anything like that, Gavan?

Gavan Ord:
Yeah, we've had those conversations. We're just starting to see some signs and yeah, it's predatory. It's these people come up during these periods of crisis and distress, and we hear all the bad stories at the end and it really never ends well.

Matthew Addison:
There is a way for businesses to sometimes think and actually approach their finances a little bit different. Typically, we think overdraft. We think of long-term. We think of, we want just a facility in place to help us run our business. But there is another way that can be thought about, not just because of the current times, but maybe you've got an opportunity, you've got a project.

And to go to the bank and go, "Look, here's the opportunity I've got. I've talked to my suppliers, this is the terms. This is when the sales will come to fruition. Can we talk about a project lending or a short-term lending?" But I just want to reemphasize Gavan's point, there's opportunistic lenders who love project funding and they'll take a significant portion. So make sure you have those discussions and be realistic. Some projects, you're happy to go in with a lender where the interest rate might be higher because you still make a significant margin out of it yourself.

Lots of opportunities, Richard, what have we said? Talk to your advisors. What finance do you need? What's the right finance facility? Talk to your existing banking arrangements, your existing lenders, but then don't cut yourself off. Think about, is there other methods you should think?

Richard Webb:
Well, there's certainly a theme coming through. Additionally, from what you've just said there too, Matthew, and that is that talking to your bank sooner rather than later is the best way to avoid pain on this. So going beyond, I guess, the stuff that you would go to the bank for, such as standard loans and overdrafts and project financing as you've rightly pointed out, what other tools or approaches can help small businesses manage their cashflow uncertainty?

Gavan Ord:
I mean, you could look at higher purchase or leasing arrangements rather than purchasing outright. A purchase outright of an asset can be quite expensive, but also just building up your own cash reserves. You don't necessarily have to always go to a lender. So try to build up your own cash reserves. But I will say, we recently launched our small business survey and we asked what was the most difficult source of finance. The most difficult source of finance was family and friends, and the easiest was banks.

So don't think, "Oh, I'll just go back to mum and dad and see what I can get from them," because that could be a very difficult source of finance. So use those traditional forms of finance, but also look at how can I build up cash reserves so I don't necessarily need financing for purchasing asset. And obviously always challenge, do I need to that asset at this point in time? Can I defer it as well?

Richard Webb:
Bank of mum and dad's a term that seems to do the rounds a lot lately, Gavan. I'll just throw in there, but I probably should throw to Matthew who's also keen to comment on that.

Matthew Addison:
Gavan am I allowed to just bounce that one back at you a little bit?

Gavan Ord:
Yeah, go ahead.

Matthew Addison:
Build up your cash reserves. I agree it's a utopia. I agree it's a nice thing to do. You opened up earlier with plan your cashflow long term. And I think in the ideal world, every business thinks about what's my one year, two year, three year, 10 year plan?

And hey, I really want to buy another piece of equipment in two year's time, build up the cash rather than look to borrow it. So I'm a little torn between reality and good planning. Because what I'm hearing from small businesses, reality is there is no cash reserve to build up.

It really is hopefully not day-to-day trading or week-to-week survival, but it'd be nice if they're at least month to month, they can see their cash ahead. I'd love them building up cash reserves for the big projects. I'm just thinking times are a bit tough at the moment.

Gavan Ord:
Yes, but there are businesses that are doing okay and they should be building up their cash reserve. Since World War II, there's been this shift to just in time and lean. And so there's actually really little fat, and that's how we've run businesses for the last 80 years as little fat as possible, which means in crisis, it actually becomes more difficult to respond.

So you're right, it's utopia for many businesses, but if you do have the capacity, please try and build up some cash buffers. In this decade, we've had COVID, we've had the war in Ukraine, we've got the Iran war. So there' s been three or four crises in five years. Usually, there's a crisis every decade. So this is a decade of crisis.

Richard Webb:
I suppose, Gavan to Matthew's point as well, the idea of building up a cash buffer is nice until the business owner says, "Well, hang on, maybe I could be investing that in something new for the business."

Matthew Addison:
Or going on holidays.

Gavan Ord:
Yeah, but build up those cash reserves for a purpose. So it could be to do that or could be to go on holiday. And if you become cash rich, you also become a target for a potential acquirer as well.

Matthew Addison:
Your just in time call out, Gavan, I really like, because I think we have had probably a couple of decades now where our management of business theory has been do everything just in time, have it delivered in the morning and have it shipped out in the afternoon sort of thing.

Whereas what we've seen over more recent times is just in time might work, but it's got a risk factor. And I like it challenging of the just in-time thing. And I think we do need to think about the right balance between just in time and it sits for cashflow as well, just in time cashflow versus how do I keep the doors open long-term?

Richard Webb:
That's a great observation, Matthew. And I think that's a tension that now exists there is the idea between making sure that everything runs smoothly enough to be able to do just in time versus planning. And that, I guess, is what today's been about. So we do need to wrap up. So I suppose I'll ask you both what the key message is today for accountants listening when they're talking to small business clients about cashflow in uncertain times. And Matthew, here's your chance to get in your last words on this.

Matthew Addison:
From the Institute of Certified Bookkeepers point of view from my bookkeeping community, what's my best advice for accountants? Please talk to the bookkeepers as well. So have the conversations. We've mentioned it a lot over the last few. Talk to the business owners, but talk to the bookkeepers who are deep in the weeds typically of exactly what's going on inside the business.

We always talk about a three-way partnership here, makes a business successful. The bookkeeper's got their role, the accountants got their role, and work with the business owner to make them really successful. What's that line mean? Have the conversations.

Gavan Ord:
Agree with that, and I agree with that three-way partnership. Work with everybody that's supporting that business. It's a challenging time, as we said, and payday super is going to add to that challenge, so prepare for that. Work through your different scenarios.

So is the war going to go on for longer? Have various scenarios, best case, worst case, middle case. Put those scenarios in place, have different options on how to respond to those scenarios, but also keep an eye out for opportunity as well. Don't close your eyes to things that could come up. Often opportunities emerged during these times, so look for those opportunities and take advantage of them as well.

Richard Webb:
Gavan, Matthew, thank you both for joining me today and for sharing such practical insights. What really stands out to me is that in uncertain times, cashflow management isn't about predicting the future perfectly. It's about being prepared, having visibility, and giving businesses options before pressure sets in.

For accountants, this is a real opportunity to move beyond compliance and play a trusted advisory role, whether that's helping clients forecast cash flows, think through funding arrangements or build resilience into their business model.

For our listeners eager to learn more, please check out the show notes for links to additional resources from CPA Australia. And don't forget to subscribe to With Interest and share this episode with your colleagues and friends in the business community. Until next time, thanks for listening.

Garreth Hanley:
To find out more about our other podcasts and CPA Australia, check the show notes for this episode, and we hope you can join us again for another episode of With Interest.