Some $6.12bn worth of growth opportunities fall through the cracks of Australian mid-sized businesses every year due to insufficient or variable cash flow, according to research released by American Express.
More than one-third (38%) of mid-sized CFO admit their business has been delayed or unable to achieve a strategic business objective due to cash flow pressures. Alarmingly, 81% of mid-sized businesses miss growth opportunities every six months or less, with the average cost of each missed opportunity costing Australian businesses around $35,000.
The logistics industry performed strongly compared with the average Australian business, with just under a fifth (18%) of CFO of logistics companies delayed or unable to achieve a strategic business objective due to cash flow pressures. However, every one of these businesses (100%) missed growth opportunities frequently – every few months or less, with the average cost of each missed opportunity worth $16,000.
While the outlook for mid-sized organisations on the whole is optimistic, with 65% of businesses forecasting growth in 2017, a special report from American Express, Behind the balance sheet: unlocking hidden value in credit, reveals cash flow pressures constrain mid-sized businesses from achieving their full growth potential.
The cash flow management conundrum
While an overwhelming 89% of CFO of mid-sized logistics companies agree that credit is a good cash flow management tool, many organisations still opt for cash over credit, rather than using cash to fund business initiatives, and using credit to manage cash flow.
Despite the opportunity presented by credit – whereby cash is kept in the business for longer – traditional methods of cash flow management still prevail. Only 41% of logistics CFO use credit to manage cash flow, with around two thirds using business loans (65%), and one third using an overdraft facility (35%) and invoice discounting (35%).
Martin Seward, vice president for small & medium enterprises at American Express Australia, said by sticking with tried and tested cash flow management methods, businesses are burning through available cash in the bank and limiting their room to drive forward strategic objectives.
“When credit is used to manage predictable cash flow, CFO can unlock hidden value in their business as well as ease the burden of cash flow management,” Mr Seward said.
“While cash flow management will always be a top priority for CFO in mid-sized Australian companies, the role of the modern CFO has evolved to become a key strategic lead within the business.
“In an increasingly competitive economy, the modern CFO cannot afford to miss business opportunities due to cash flow pressures nor expend all their energies pouring over the weekly ebb and flow of cash.”
Effective cash flow can unlock additional funds to help logistics CFOs capitalise on business opportunities. With extended cash flow in the business, these CFOs said they would fund staff training (53%), hire staff (41%) or purchase new equipment (47%). Additionally, nearly one third of businesses (29%) would increase their investment in innovation and R&D.
“The benefits of using credit as a cash flow management tool are threefold – an extended interest free period delays upfront payment, keeping cash in the business for longer, while lining supplier payments up with statement cycles helps receivables arrive before expenses are due”, Mr Seward said.
“Thirdly, early payment discounts can be negotiated with suppliers by creating a history of reliable on-time payment.”