Cash is king

Avoiding confusion

Even a business that is initially profitable can fail due to a shortage of cash.

“The big issue is that most people confuse revenue with profit,” says Doug Mathlin, director of FrontRunner Consulting Group.
And Nikki White, a small business efficiency expert and strategist, often witnesses this confusion herself: “Small businesses can mistake profit for cash flow,” she says.

Proper cash flow is essential if a business is to remain solvent – to be able to meet its financial commitments. Having sufficient cash on hand ensures that creditors and staff can be paid on time; without the cash needed to support its operations coming in, a business can soon find itself on the road to bankruptcy.

“It’s expensive now to run a mortgage business,” says Mr Mathlin. “With compliance, technology and aggregation expenses, the cost of doing business has gone up dramatically.”

Risks of poor cash flow management

“Almost half of all small businesses starting up in Australia fail,” Ms White says. “The Australian Bureau of Statistics found 42 per cent of small businesses fail in their first few years, while a recent study of 2,200 small businesses in the United States found 68 per cent of those business owners conducted absolutely no cash flow management.”

Those statistics alone should cause any small business owner – brokers included – to sit up and take notice.
Ms White believes far too many people fail to understand that cash flow is the make-or-break aspect of their business.

“This is especially true for small businesses that are moving out of the start-up phase into the growth phase. Success means stock, expenses and receivables can easily increase faster than profits can fund them,” she says.

Dr Stephen Troloar, principal coach and mentor at Coaching & Mentoring Australia warns that the Corporations Act in Australia is extremely unforgiving of companies that are unable to pay their debts.
“The rules in regards to insolvent trading are extremely tough in Australia, a lot tougher than in other parts of the world,” he says.

Common cash flow mistakes

“There are many cash flow management mistakes that small businesses make, including mistaking profit for cash flow, not understanding the lag time in a cash flow cycle and the sloppy management of invoices, stock, and credit,” says Ms White.

She adds that it is alarmingly common for small business owners to feel too guilty to discuss their budget concerns or budget failures with a mentor or accountant, denying themselves a potentially vital source of help.

“They keep quiet because they hope the situation will improve,” Ms White says, “but it may not improve without a smart intervention.”

Brokers face some additional challenges to those that all small business owners face regarding cash flow management.
Will Foster, director at Property Planning, says brokers need to ensure they check their upfront and trail statements diligently to make sure there are no mistakes – and that they’re getting the revenue they require.

“Really knowing what’s going out of your business accounts and your credit cards is important as well,” says Mr Foster. “This obviously helps you control your expenses because if you’re seeing more and more going out, you can stop it pretty quickly.”

Mr Foster admits to having had cash flow crises in the past himself, but says that no matter what, staff must get paid first.

“I think the biggest thing is making sure that staff are paid first because they’re the ones that really control how your company appears to the outside world and you want that to be your main priority.”

Small business salaries

FrontRunner Consulting’s Doug Mathlin advises that if they can, brokers should aim to pay themselves a salary rather than make their remuneration entirely commission-focused.
That way, they will know exactly what their payroll obligations are each month.
On top of this, they should carefully monitor the documentation they submit to lenders and their aggregators to ensure there are no delays in commission payments – or disruptions to cash flow.
Some lenders have found that up to 50 per cent of loan applications submitted by brokers have something missing, which not only delays the deal but also pushes back when brokers get their cheque from the lender.

“Brokers need to make sure that the quality of the deals they submit is perfect,” says Mr Mathlin.
Anything from missing payslips to signature errors can delay the process. “These are all things that even a broker with just three months’ experience has to know. If a deal is submitted without everything on the checklist completed, that’s a quick way to get a delay,” said Mr Mathlin. “If you want to get paid quickly, if you want your deals approved more quickly, quality is absolutely key. In the banking world, ‘near enough is good enough’ doesn’t work.”

Mr Foster tries to pay himself a salary every month and sees several advantages in this approach.

“It gives you a number to shoot for in terms of loan settlements and your income generation,” he says. “It gives you a bit of financial discipline.
“If I haven’t made enough money in the preceding month though, then I’m the last person to get paid. If that’s the case, I’ll just have to tighten the belt at home.”

Ms White also believes salary payments are essential: “I encourage small business owners not to forget to pay themselves a market-based wage for the work they are doing,” she says. “This will help maintain boundaries between their business and personal life.”

Costs and business growth

Sound cash flow management has helped Mr Foster grow his business and recently the company moved to larger offices. However, with this growth came extra business costs, putting pressure on cash flow despite his effective management earlier.

“The building was a bit more expensive than we thought,” he says. “There were just a few added expenses along the way. When those came in, we were very honest with our suppliers.”

And honesty, according to Mr Foster, is the key to dealing with contractors. In this case he asked the suppliers if he could pay them at the end of the month to ensure his business’ cash flow stabilised, then everything was back to normal.
Success, adds Ms White, must be managed with cash flow in mind.
When a successful business starts to expand, “the resulting cash crisis can force an entrepreneur to lose equity control of the business, or ultimately declare bankruptcy and close,” she says. 

Sound cash flow management gives an owner the opportunity to increase support staff, expanding marketing and business development activities and move to larger offices.

“If a small business does accumulate a surplus of cash, I recommend they park the money in a high interest savings account that is linked to their day-to-day account for quick, easy access,” says Ms White
“Having surplus cash saved is reassuring to lenders and investors, and also good for their own sanity.”

‘Cash is king’

Lack of understanding and poor management seem to be the commonest ways in which small businesses run into trouble over cash flow, with lack of capacity to pay the bills representing a very real threat to the business’ survival.

“The old saying that ‘cash is king’ is very true, particularly in a difficult economy,” says Dr Troloar.
Even small brokerages deal with large amounts of money so they need to be particularly aware of, and able to manage, their cash flow. In doing so, they can both expand their business and focus on helping clients with their loans.