The Cash Flow Crisis

Australian SMEs face a cash flow paradox:

The Reality:

82% of business failures are due to cash flow problems
60% of profitable businesses experience cash flow stress
Average payment delay: 23 days overdue
Typical SME cash buffer: 27 days (dangerously low)

The Cost:

Missed growth opportunities
Expensive emergency financing
Supplier relationship damage
Owner stress and burnout
Business failure

The Solution: Proactive cash flow management.

Understanding Cash Flow

Profit vs Cash Flow

Critical Distinction:

Profit: Revenue minus expenses (accrual accounting)

Cash Flow: Actual money in minus money out (cash accounting)

Why They Differ:

Credit sales (revenue recognized, cash not received)
Prepaid expenses (cash paid, expense recognized later)
Depreciation (expense with no cash impact)
Loan repayments (cash out, not an expense)
Asset purchases (cash out, capitalised not expensed)

Key Insight: You can be profitable and still run out of cash

The Cash Conversion Cycle

Formula:

Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payables Outstanding

Components:

Days Inventory Outstanding (DIO):

How long cash is tied up in inventory
Formula: (Average Inventory / COGS) × 365
Target: As low as possible without stockouts

Days Sales Outstanding (DSO):

How long to collect payment after sale
Formula: (Accounts Receivable / Revenue) × 365
Target: As low as possible (industry dependent)

Days Payables Outstanding (DPO):

How long you take to pay suppliers
Formula: (Accounts Payable / COGS) × 365
Target: As high as possible without damaging relationships

Example:

DIO: 45 days
DSO: 52 days
DPO: 30 days
Cash Conversion Cycle: 45 + 52 - 30 = 67 days

Implication: You need 67 days of cash to fund operations

Cash Flow Forecasting

The 13-Week Cash Flow Forecast

Why 13 Weeks?:

One quarter (standard reporting period)
Long enough to see problems coming
Short enough to be accurate
Bank-standard format (if you need financing)

Structure:

Week 1-4: Detailed Daily/Weekly

Every receipt and payment
High accuracy required
Used for immediate decisions

Week 5-13: Weekly Aggregates

Weekly totals
Good estimates needed
Used for planning

Template:

Opening Cash Balance
+ Cash Inflows:
  - Customer collections
  - Other income
  - Financing received
= Total Cash Available

- Cash Outflows:
  - Supplier payments
  - Wages and salaries
  - Rent and lease payments
  - Loan repayments
  - Tax payments
  - Other operating expenses
  - Capital expenditures
= Total Cash Outflows

= Net Cash Flow (Inflows - Outflows)
= Closing Cash Balance

Building Your Forecast

Step 1: Opening Balance

Start with actual cash in bank today

Step 2: Cash Inflows

Customer Collections:

Start with accounts receivable aging
Apply collection probabilities:
Current: 95% collected on time
1-30 days overdue: 80% collected
31-60 days overdue: 60% collected
60+ days overdue: 30% collected
Factor in payment terms
Be conservative

Other Inflows:

Asset sales
Refunds
Financing (only if confirmed)
Owner injections (only if committed)

Step 3: Cash Outflows

Fixed Payments (certain amounts and dates):

Rent/lease
Loan repayments
Insurance
Subscriptions
Salaries (known amounts)

Variable Payments (estimate based on history):

Supplier payments (based on AP aging + payment terms)
Utilities (average + buffer)
Cost of goods sold (linked to sales forecasts)
Commission (linked to sales)

Periodic Payments (don't forget these):

Tax instalments (PAYG, GST)
Annual bills (insurance, subscriptions)
Bonuses
Equipment maintenance

Step 4: Calculate Net Cash Flow

Inflows - Outflows = Net Cash Flow

Opening Balance + Net Cash Flow = Closing Balance

Step 5: Review and Refine

Does closing balance make sense?
Are there weeks with negative cash?
Is the timing realistic?
What could go wrong? (build scenarios)

Scenario Planning

Base Case:

Most likely outcome
Used for planning

Worst Case:

Collections 20% slower
Revenue 15% lower
Expenses 10% higher
Used for stress testing

Best Case:

Collections 10% faster
Revenue 20% higher
Used for opportunity planning

Action Triggers:

**If cash balance 30%

DSO trending up
Negative cash flow in Month 2

### Warning Signs

**Immediate Action Required**:
- Cash balance declining for 3+ weeks
- Overdue receivables >25%
- Can't pay suppliers on time
- Using credit cards for payroll
- Overdraft limit approaching

**Strategic Action Required**:
- Cash conversion cycle increasing
- DSO trending up
- Inventory turnover slowing
- Profit margins compressing
- Revenue growth outpacing cash generation

## Australian SME Considerations

### Tax Obligations

**GST**:
- Quarterly or monthly reporting
- Payment due 28 days after quarter-end
- Can be significant cash outflow
- **Strategy**: Set aside GST in separate account as collected

**PAYG Instalments**:
- Quarterly prepayments of income tax
- Based on prior year tax
- Can be adjusted if current year different
- **Strategy**: Review instalments annually, vary if needed

**Superannuation**:
- Quarterly payments
- Due 28 days after quarter-end
- Penalties for late payment (heavy)
- **Strategy**: Accrue monthly, pay quarterly

### Industry Payment Practices

**Construction**:
- Progress payments standard
- Retention common (5-10%)
- Payment delays notorious
- **Strategy**: Clear contracts, deposits, lien rights

**Retail**:
- Immediate payment (EFTPOS, credit card)
- Cash flow typically strong
- Inventory is main cash use
- **Strategy**: Inventory turnover focus

**Professional Services**:
- 14-30 day terms standard
- Work-in-progress ties up cash
- **Strategy**: Progress billing, retainers

**Manufacturing**:
- 30-60 day terms common
- Inventory + receivables tie up cash
- **Strategy**: Just-in-time, milestone billing

### Economic Environment

**Interest Rates**:
- Impact borrowing costs
- Affect customer spending
- Influence investment decisions
- **Strategy**: Stress test at higher rates

**Exchange Rates**:
- Impact importers/exporters
- Create opportunities and risks
- **Strategy**: Hedge if material exposure

**Commodity Prices**:
- Impact input costs
- Affect customer industries
- **Strategy**: Pass-through clauses, diversification

## FAQ

**Q: How much cash should we keep in reserve?**
A: Minimum 3 months operating expenses. Ideal: 6 months. Depends on: revenue predictability, access to financing, growth stage, risk tolerance.

**Q: What's the biggest cash flow mistake?**
A: Confusing profit with cash flow. You can be profitable on paper and still run out of cash. Monitor cash weekly, not just monthly P&L.

**Q: How do we handle seasonal cash flow?**
A: Build cash reserve in peak season. Use overdraft for troughs. Time major purchases for peak season. Consider seasonal staffing. Forecast 13 weeks ahead minimum.

**Q: Should we offer early payment discounts?**
A: Usually no. The cost (annualized 30-40%) exceeds financing alternatives. Better: improve invoicing, follow up systematically, make payment easy.

**Q: When should we seek external financing?**
A: Before you need it. Best time: when you're strong. Options: overdraft (ongoing), invoice financing (growth), term loan (assets). Don't wait until desperate.

**Q: How do we improve DSO?**
A: Invoice immediately. Clear payment terms. Systematic follow-up. Multiple payment options. Progress billing. Deposits for new/high-risk customers. Make it easier to pay you than to not pay.