Two matters should concern those owning and operating businesses and farms.
- The reserve bank question of whether to lower the interest rate below 1.5%.
- Reports of cashflow problems so acute that business owners are having to pay wages late. Small Business Commissioner Kate Carnell, herself a former successful small business owner, has today spoken out on this issue.
This indicates two serious financial problems that should be dealt with quickly.
- The business is operating as a bank or financier for its customers.
- Net Profit as a percentage of turnover is too low.
Consider the response of saddle and clothing maker, R.M. Williams decades ago when offered a job making a saddle for pastoralist Sir Sidney Kidman, who offered to pay 30 days. R.M. Williams responded with something like “I could not afford to wait 30 minutes .”
In my Chartered Accountancy practice years ago I realised that many tax clients had us do their accounting , financial statements and tax returns but did not much worry about paying until next year’s work was about to commence.
My first move was to increase my fees and offer a 10% discount to everyone who paid within 14 days. That cut my debtors’ ledger balance by about 65%. The other 35% still paid late.
My second move and current practice was to ask for a substantial amount in advance with regular top ups as we completed work, so we always had funds in advance. This completely eliminated our debtors ledger and made it a lot easier to pay staff and draw money to live on. I helped people make money or cope with banks, instead of financing them myself.
People who this did not suit simply went elsewhere for the financial guidance on business and farming matters and to get their problems with the bank resolved.
I recommend these sound financial strategies to all operators. I understand that they will not suit every situation. Farmers for instance will not be paid in advance for their stock or crops, but stock sale proceeds flow through very fast these days with a good agent.
Cashflow shortages result from the difference between money coming in and money going out of a business. Many owners opt for a bank loan to solve their cashflow problems. What they often do not factor in is that there will be interest and charges on their loan that will reduce profitability and cashflow further and maybe some extra loan compliance costs. That can make the situation worse rather than better. In addition, before those interest and fee charges can be removed, the loan must be repaid and that can only be done out of profit and excess cashflow. Borrowing to cover a cashflow problem is sometimes a good temporary solution, but it can be the worst of all possible solutions if the debt is not quickly eliminated.
Three other solutions present themselves.
- The easiest is to get on the phone, or let us do so for you, and ask your creditors for time to pay with a definite monthly plan to slow down payments for a few months and get back to payment on time within six months or so. Most of your suppliers will help you in this way if you are a good customer, because they want to keep your business.
- Get on the phone to those who owe you money, or have us do it for you, explain your cashflow problem and ask if they could possibly pay current outstanding money now so that you can continue to operate. If they value your service, most will do this to help you. You may do the same for them or someone else one day.
- Phone us at Gbac and arrange for us to look over your figures and business and advise you on how to improve your profitability and cashflow on a long term basis. Where we have been engaged to do that for businesses and farms they have dramatically improved both profitability and cashflow and also eliminated costly and time consuming debt.
Never be afraid to ask for assistance and call in someone who knows what it is like to run a business or farm as we have done – art rental, equipment rental, real estate, sheep, cattle. Consultants who have never done the job themselves talk from a fairly theoretical viewpoint. It is a lot different when the consultant has had to manage and solve their own business and farming issues to make money and enjoy life.
There is every indication that Australia is heading towards a monumental financial disaster along with many other countries world-wide. There comes a time when debt is so high that the interest on it and prospective repayment require more than is available from revenue. That is a debt trap from which there is no escape. Australian Governments have survived so far mainly by selling off assets to foreigners which means the people end up paying more for services. Even some of our hospitals, power and phone services have been sold off to foreigners with no interest in anything other than profits.
It is time to tighten our belts. The economy is now like a game of “pass the parcel”. The government is encouraging people to borrow and spend with low interest rates to stimulate the economy, but when the stuff hits the fan it will be those with cash in the bank or under the floor who will survive best and those with the highest debt who lose everything they have ever worked for. This is a time for caution, not panic. If the economy survives unscathed then those who have improved their farm and business profits and cashflow will go well. If the economy tanks they will be the best able to withstand it until it recovers.
Gbac is devoted to assisting Australian businesses and farm owners to come out well and it has excellent systems to improve their profits and cashflow and to protect them from abuse by predatory lenders or impatient creditors.