The Cashflow Gap (Part 1): How retailers and wholesalers can manage the gap in today’s economic climate

A recent report published by Xero exposed the toll that late payments and unpaid invoices are taking on our retailers. A staggering 62% of small businesses have encountered either a late or completely unpaid invoice in the past year. While many were able to roll with the punches, 38% reported that late payments had delayed their own payments to a supplier, setting an ugly chain of dominoes in motion.

But today's cashflow problems go beyond this. In the modern economic climate, wholesalers and retailers are being hit by recent developments in the world trade war between China and the US, as well as a decline in the Aussie dollar.

In July 2018 Western Union currency strategist Steven Dooley and corporate hedging manager David Evans-Marcius discussed some of the challenges facing Australia's retail and wholesale sector. They expressed their concerns with particular regard to the Australian dollar, which slumped by 5% on FX rates in June alone, placing immense pressure on small businesses.

The Key Factors Behind the Cashflow Gap

So what is causing this sorry state of affairs? You may already be aware of some of the age old causes of a cashflow gap. You may have experienced the challenges they pose yourself.

These include:

1. Failing to follow through on collections

Many businesses are happy to let some of their profits slide rather than methodically collecting all receivables due. Many consider this simply to be an unavoidable cost of doing business. Don't fall into this trap. Instead, make it your priority to receive the money you are due on every transaction.

2. Pricing errors

David Finkel, writing for Inc.com in 2014, highlighted how many retailers are way off in their pricing. Finkel explained that the common reaction to a cashflow issue is to drive sales by dropping prices. However, if prices are too low, even an increase in sales is going to harm your returns as every item sold represents missed potential.

3. High expenses, low sales volume

For many retailers, the simple fact is, their outgoings especially property rent are too high while their volume is too low. Redressing this balance is a major step towards securing a healthier cashflow rate for your business.

4. Issues with funding and finance

Businesses need funding in order to grow and to thrive in the market. Often, this funding and financing can be difficult to secure.

5. The intensifying trade war between China and the United States

With Australia highly exposed to global trade and global trade expectations, growing tensions between the US and China have seen the AUD/USD lower. This has caused costs to rise for both retail and wholesale businesses. 

As Evans-Marcius and Dooley explained, the international trade war is just one factor causing problems for the AUD market here in Australia. Other factors weighing in the AUD include:

• High US interest rates
• The Australian Reserve Bank's reluctance to increase its own rates
• Growing weakness across global sharemarkets and emerging currencies

Unfortunately, none of these currency related factors look likely to change in the near future.

The above international trade factors have resulted in a FX spot rate at well below most businesses budgeted forecast. Budgeted rates need to be competitive and achievable in order to maintain a strong position in the market. As most SME wholesalers and retailers do not have the luxury of adjusting their budget rate, they may need to rely on “defensive hedging” to cut any losses and to afford protection for their business.

Defensive hedging – i.e. taking a hedge from a position of weakness – is not healthy for the sector, and is likely to prove to be a stop-gap move rather than a viable long-term solution.

What Can Be Done to Reduce the Cashflow Gap for Retailers?

In such turbulent times, finding an effective solution is vital. In this section, we will examine the effective methods for navigating this new retail landscape and for closing the yawning cashflow gap.

1. Better pricing structures for more advantageous margins

Never undersell your products. It is better to sell a reduced volume of products at close to their market value rather than desperately offload your inventory at a discounted rate.

2. Streamlining the receivables cycle

Put a plan in place for maximising collections on all your receivables and for accelerating the process. Make sure invoices do not fall through the net.

3. Negotiate new payment terms with major customers

This kind of streamlining may not always be possible, especially with very large retailers. However, trying to negotiate a reduction in your payment terms from 120 days to 90 days can hugely benefit your cashflow cycle.

4. Exploring alternative finance options

Alternative lenders such as Banjo Loans can provide effective short-term funding to help you close the cashflow gap.

5. Negotiating extended terms with suppliers

Rather than letting things turn sour with a supplier, consider negotiating extended terms while cashflow problems persist.

6. Reducing FX risk

Businesses can reduce the risk posed by the dollar's FX rate by;

• Protecting against exposure from further FX downslide on the Australian Dollar by hedging for as long and for as much as they can, based on their forecast for the next financial year. Not all businesses will be comfortable doing this, however.
• Introduce pricing and budgeting flexibility in case the Australian Dollar rallies in the short term.
• Hedge defensively by reducing the duration of hedges, providing protection from further falls in dollar value but retaining the ability to benefit from an upturn. Reducing the hedged volume by hedging only half of the invoice value, again offering protection against further falls but still providing the ability to benefit from a move the other way.
• Diversifying product ranges to increase flexibility and agility while also protecting against downturns on the Australian Dollar.

 By stepping up to the cashflow gap now, retailers can turn things around and thrive, even in today's more challenging business climate. Next up in this series: The Cashflow Gap (Part 2): How retailers and wholesalers can reduce the gap by managing inventory

Written by Andrew Colliver

Last Updated: 14 March 2022

Published: 15 July 2019