Five tips to help small businesses weather the “perfect financial storm” this EOFY

With the end of the financial year approaching, developments in the past few weeks have left even the most successful small business owners concerned about what lies ahead. 

The chronically turbulent situation for Aussie small businesses — high labour and other input costs, high taxation by worldwide standards, and high costs of compliance — seems to be reaching an acute peak. The minimum wage rise is set to take effect on July 1, the RBA has signalled the high probability of another interest rate hike, and some analysts are predicting a one-in-three chance of a recession in the next year. 

More than a few small business owners have told me that they feel like they are headed towards a “perfect financial storm”. Even before this, the wellbeing of small business owners is lagging behind that of the general population, and that of small business owners in other countries. The biggest source of stress for most of them is cash flow. 

While none of us can control the economy, there are a range of small but effective measures that small business owners can take to improve or safeguard their cash flow and weather the storm. 

Incentivise early payment

Late payment by customers is a common source of financial pressure for small businesses. There is nothing more frustrating than not having enough cash on hand to pay suppliers or staff, knowing that that cash was supposed to be in your account last week. 

Generally, the best way to address this without ruining a precious relationship is with a “carrot” rather than a “stick”. Customers can be encouraged to pay early with discounts for paying before the invoice’s due date, perhaps on a sliding scale (the earlier you pay, the greater your discount). 

While it may seem counterintuitive to forgo revenue in this way, businesses often save more by getting invoices in early than they lose in what they give away in discounts. This is because early payments mean they are less reliant on financing to pay suppliers and staff. 

The time value of money is the most important financial principle for business owners — money available to you today is worth more than the same amount in the future.

Use invoices and proposals to clearly communicate payment terms and penalties

Invoices and business proposals are important channels of communication with customers and ones that they’re likely to actually read. Use them to clearly define your payment terms, in bold or red text if necessary, and spell out penalties for late payment where applicable (the “stick” approach is sometimes necessary). 

If you are going to impose penalties for late payment, it is important to remember that these need to be included in your terms of service/business from the outset of the customer relationship. Don’t give them any legal reason not to pay up.  

Implement automated payment reminders to customers

It’s important to remember that your customers are often busy and stressed, too. Sometimes, the reason for late payment is as simple as a customer’s having forgotten about the invoice. You can guard against this by implementing automated payment reminders. 

Most small business accounting systems allow you to set up invoice reminders automatically. If yours doesn’t, consider switching to one that does. 

Use budgeting and forecasting software to plan your finances

While many small businesses are using cloud-based accounting systems, most of these systems aren’t a complete solution for financial management. There is a range of tools available that allow you to automate your budgeting, saving time by eliminating cumbersome spreadsheets, and offering insights that would usually only be available to those formally trained in accounting. 

Many businesses don’t understand their breakeven point, for example, or know when they’re in an appropriate position to do capital expenditure. Good decision-making in business is evidence-led, and it is easier than ever before to generate easy-to-use data that can guide your choices as a business owner.

With data-driven decision-making, businesses can optimise their financial strategies and navigate through challenging times more effectively.

Protect yourself against bad debtors and fraudsters

Every business should be credit-checking both their suppliers and their customers (especially high-value customers) through a credit bureau. While the reason for wanting to know the financial position of customers is obvious, many aren’t aware of the risks that supply chain disruption due to suppliers’ financial problems poses to their business. If you know that a potential supplier has a poor credit rating, use this to negotiate better terms, or find another supplier. 

Bad debtors aren’t the biggest threat facing Aussie small businesses, however — fraudsters are. The ACCC recorded $23.2 million in business losses to scams in 2022, up 42% from $13.4 million in 2021. Small businesses (between five and 19 employees) saw a 61% increase in losses to fraud. Business owners need to invest more time verifying invoices and other communications with suppliers and should consider moving over to eInvoicing as soon as possible. The ATO offers free resources to make this transition simple and seamless.  

In a nutshell, the key to surviving and thriving in challenging times lies in proactive financial management and making informed decisions based on reliable data. With the right tools and strategies in place, small businesses can confidently navigate the challenges posed by the “perfect financial storm” and thrive in an ever-changing business landscape.

Wayne Morris is the CEO of Fifo Capital.