Someone once told me:
Revenue is vanity.
Profit is sanity.
Cash flow is reality.
How often do we hear about small, growing businesses that were making great profits but were strangled by cash flow? It is summed up well in the old saying: “they went broke making a profit”.
With recent reports suggesting average debtor days have blown out to more than 54 days since the beginning of the GFC, many small businesses continue to suffer and/or close their doors due to shortfalls in available cash, which ends up languishing in trade debtors, stock or (in many cases) bonds and other security instruments.
So what is the best way to solve the cash flow problem? Various business experts suggest a range of strategies such as offering discounts for early payment, streamlining the supply chain to reduce capital tied up in stock and tighter credit policies.
But for mine, the most logical and least disruptive approach to keeping on top of cash flow is asset finance, in particular invoice discounting (aka factoring, debtor finance, etc.). Solutions exist for businesses of all shapes and sizes, and cover the broad range of credit-worthiness profiles. The major banks offer products commensurate with the risk they are prepared to take on (which is not much, by the way), whilst alternative lenders can provide secured and unsecured facilities for businesses with a few more warts on them.
From an exit planning perspective, asset finance facilities can be a vital strategy, as the freed up cash flow can be directed into other value-creating assets and activities for the business that the set the business up for maximum enterprise value. And best of all, with the most common valuation method being capitalisation of earnings, the majority of businesses will be valued on the basis of their EBIT/DA, meaning the cost of the finance provided will not adversely influence the capitalised earnings figure.
With all of this in mind, we at Acquisiti have made the decision recently to provide an Invoice Finance service, in which we evaluate the business, determine the most appropriate lender/s, facilitate the application process and ensure the deal gets across the line. In many cases, the lender pays the our success fees, so your own out of pocket expenditure could be limited to the upfront consulting services (this only applies to those lenders with which we have a formal referral arrangement).
So if cash flow (or the lack thereof) is giving you sleepless nights and putting your enterprise on the knife’s edge, contact us to see if Invoice Finance could work for you.