Avoid cash flow from crippling your business
An inquiry into payment times and practices in Australia by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has revealed that poor cash flow is the primary reason for insolvency in Australia – and the biggest source of anxiety for the small business sector.
So, we asked experienced corporate and small business lawyer Ursula Hogben from Real Time Minds about consumer law and how to better manage cash flow and late payers.
HH: Would you say a lack of cash flow is a key contributor to small businesses failing in Australia?
Ursula: Cash flow is one of the key contributors to small business failure, along with lack of strategic planning and record keeping. Cash flow issues often arise when a small business pays fixed payments that cannot be late – such as payroll, rent, the cost of producing the goods or services sold, and delivery – but is not paid for 60 or 90 days or more.
HH: With the ASBFEO inquiry revealing almost half of all the small businesses that responded are owed more than $20,000 from late payments and 14 per cent of businesses have more than $100,000 owing, what kinds of financial repercussions could that lead to?
Ursula: A typical small business does not have unlimited cash at bank nor overdraft facilities. It needs prompt payment by clients, to pay for the costs it incurred in selling and providing that product or service to the client.
HH: From a legal perspective, what rights do small business owners have?
Ursula: The Australian consumer law now protects small businesses, as well as individual consumers, from unfair terms in standard contracts. A term that lets a supplier increase its prices, without the small business being allowed to end the contract, may be unfair. A term that lets a supplier automatically roll over the contract, without the small businesses express consent, may also be considered unfair.
HH: Do you have any advice or tips on how small business operators can better manage cash flow and late payers?
Ursula: Yes, a few, including:
- Obtain payment up-front where possible, either with a deposit or partial payment
- Obtain milestone payments as soon as possible. If you buy third-party products or services for your client, have your client pay directly, or have them reimburse you straight away
- Have short invoice terms, e.g. collect and pay, or five days
- Make it easy to pay using a credit card
- Have robust T&Cs that set out what you will provide, the price, and that permit you to charge interest and to refer a debt to a debt collector