During difficult financial times, it is extremely important to manage the financial health of a business, which includes liquidity – the availability of liquid assets, such as cash. Liquidity management is a function that enables a business to meet their financial obligations through either cash flow, funding activities, and/or capital management, and grow.

Why do I need to manage my liquidity?

Most businesses will have a portion of their value tied up in investments and assets, such as real estate, inventory and equipment. But to succeed and fund everyday operational expenses and growth, it is important to have some liquidity built into your balance sheet.

Efficient liquidity management will ensure your business is able to access cash when you need it to pay for goods and services, make payroll, and invest in new opportunities that may arise.
Even profitable companies can fail – by purchasing inventory or incurring production costs long before their customers pay for the goods or services, for example – if they don’t have the cash available to pay bills. A short-term demand on funds is covered by having cash on hand to continue operating.

As companies grow and expand, they usually spend even more on new employees, new facilities, new inventory and new equipment, but if they have to wait too long to get paid by their customers and if they don’t have extra cash on hand, they could get behind on their obligations and end up with extra debt or even in bankruptcy – as experienced by Max and his chocolate empire.

The downfall of retailer, Max Brenner

Max Brenner

Max Brenner

In 2016, an expensive overhaul of Max Brenner’s head office and a fall in turnover hit cash flow so hard that the company stopped paying staff superannuation for six months.

In 2018, turnover continued to fall to $41.3 million and Max Brenner operated at a net loss of $5 million for that financial year.

Staff of the chain are estimated to be owed a combined $5.8 million, including $2.7 million for 250 staff made redundant.

Administrators estimate creditors are owed $33 million. The company also owes $1.86 million in superannuation payments and $2.5 million in GST and pay-as-you-go requirements.

Reading the signals

There were a number of red flags that Max Brenner chose to ignore:

  1. Continued rapid growth, together with a lack of capital, stretched capital expenditure with limited consideration of projected profits in a competitive retail environment
  2. An office renovation hit cash flow so hard they were unable to pay staff superannuation
  3. They were unable to pay suppliers.

Eventually, an application was issued by Sunstate Ceilings to wind up the retail chain.

Better practices

Before undertaking any substantial renovation or embarking on extensive growth, it would have been prudent for Max Brenner to undertake scenario planning or strategic forecasting to understand the financial ramifications of their investment, and the implications it would have on cash flow and other parts of their business.
The appointment of an experienced business advisor would have helped provide the skills and strategic insights required to plan and forecast likely business impacts, as well as ensure all compliance obligations continue to be met.

The advisor would also be well placed to perform a review of the company position and structure to provide the recommendations to help secure the longer-term financial health and sustainability of the business.

The business should have used a 3- way forecast model to stress test scenarios before undertaking any critical decisions such as investing in extensive growth and renovations. When planning these scenarios, firstly the business should have looked at the base level that is variables such as wages, PAYG, tax and any other obligatory payments. From this base level, the business would have had foresight on the cash that was/wasn’t available to invest in growth.

Max Brenner should have spoken to a professional for advice on how they could restructure certain areas of the business to determine the greatest protection and return.

Managing your business cash flow

There is a sudden urgency for short term cash flow solutions to maintain liquidity and protect the business. A number of finance products and strategies can assist in this instance.

Consolidate debt

Combine your existing loans into a lower interest rate product, saving the business interest rate payments over the long term.

Government Grants and Stimulus Packages

There are a number of stimulus packages for businesses who have been impacted by COVID-19, as well as ongoing Government grants which are available to eligible businesses who want to invest in expansion, research and development, exporting or innovation. To find out more head to the Australian Government website.

Insurance Premium Funding

To spread out the repayments for your business insurance rather than paying it in one lump sum. It’s simple, cost effective, and frees up cash flow to be utlised in other parts of the business

Surety Bonds

Businesses are using Surety Bonds to meet collateral commitments. The benefit of a surety bond is that it doesn’t count against a company’s overall borrowing capacity and it frees up cash for other uses in the business.

Business Loans

Look at your current financial position and your short-term cash flow needs to assess whether or not a business loan would help. An example of a short term finance solution would be a line of credit or an overdraft facility.

Consider other finance products

Such as debtor finance or asset-based lending to release pressure from accounts receivable; asset finance for inventory accounts; or supply chain finance and dynamic discounting for accounts payable.

9 practical ways to improve the liquidity of your business

Volatile financial markets creating uncertainty is a key feature of the current business landscape. Many businesses have seen a reduction in operations due to a decrease in demand – leading to liquidity risks, pressure on covenants, and increasing refinancing requirements.

A liquidity management strategy means your business has a plan for meeting its short-term and immediate cash obligations. For companies that are over-leveraged, a liquidity management strategy includes developing steps to reduce the gap between the cash available on hand and their debt obligations.

Use a 3-way Forecast to stress test the business

This is a prerequisite to a robust cash management system. It enables businesses to model the impact of a slow down and take early corrective action to ensure they preserve cash flow. It allows businesses to stress test scenarios before making critical decisions, such as investments, research and development or taking money out of the business.

Fund & preserve cash

Funding business assets will enable operations to continue without depleting cash reserves.

Use sweep accounts

This functionality is often available through your current financial institution. You can earn interest on any excess cash by automatically transferring the funds into a higher interest-bearing account when the funds aren’t needed and the sweeping or transferring them back to your operating account when you do need the cash.

Reduce your overhead costs

Assess your overhead expenses, like rent, and look for opportunities to decrease them. Lowering overhead will have a direct & positive impact on your profitability.

Reduce any unproductive assets

Time to get rid of any unused assets. Moving forward consider if any new assets, such as buildings, equipment and vehicles, will generate revenue.

Monitor accounts receivable

Staying on top of your accounts receivable will ensure that you are billing your clients on time and that you receive prompt payments.

Negotiate accounts payable

On the flip side see if you can negotiate more favorable and longer payment terms with your suppliers – this will give you access to funds for a longer period of time.

Minimise any owner drawings

Monitor the amount of money that’s being taken out of the business for non-business purposes such as owners drawings. Taking too much money out can put an unnecessary cash drain on the business.

Review profitability

Set up a reminder to review the profitability on your various products and services. Look for opportunities where you can increase the pricing structure or reduce the costs of providing the goods and services and take into consideration any changes in the market and/or industry you operate in.

Navigating your changing business landscape

Meet the specialists

Finance specialist: Brad Spencer

Brad has been in banking & finance for over 25 years. During that time, he has had a variety of rolls across Australia and gained broad experience in providing all types of lending solutions from personal lending to equipment finance, business & working capital solutions, and property investment & development funding.

Before joining Ledge, Brad was a relationship manager with one of the major banks, and he has since added to his wide financial experience by completing Certificate IV in Finance and Mortgage Broking.

M: 0481 196 496
E: brad@ledge.com.au

Legal specialist: Murray Thornhill

As one of two Directors of HHG Legal Group, Murray is a leader in dispute resolution and litigation, and has led the business and government division of HHG Legal Group since 2003.

Murray is an experienced, skilled and efficient commercial dispute resolution lawyer. He leads and co-ordinates our litigation, commercial and property teams – Murray’s practice focuses on dispute resolution for SME’s and individuals in construction, insolvency, employment, and trusts and estate litigation. He has represented clients in most Courts and tribunals in WA and the Federal and High Courts, and has also advised substantial charities, school associations, principals, board members and other non-profit bodies on their unique legal challenges. He is also an experienced presenter & educator on a range of legal issues to industry and to professional and government bodies. Murray is a Notary Public with experience in all aspects of notary work.

E: murray.thornhill@hhg.com.au

Insurance specialist: Tracey Thorn

M: 0481 293 889
E: traceyt@knightcorp.net.au

Accounting specialist: Ross Prosper

Ross’s expertise in tax and business advisory spans the spectrum of accounting, business structuring, superannuation and complex tax advice. He works with a broad range of clients including family owned small to medium enterprises and large corporate groups.

When providing solutions to clients, Ross takes a “big picture” view and ensures that structuring is thoroughly considered from the outset. By considering the implications that structuring decisions will have at various points in a business’s life cycle – particularly at the point at which a business will cease operating, be sold, or passed onto the next generation – Ross offers clients a holistic perspective that has helped many to recognise potential opportunities.

M: 0407 440 535
E: rprosper@perth.bentleys.com.au

Join in the conversation

Navigating Your Changing Business Landscape: Finding Opportunity in the current Climate is a series presented by Ledge Finance, HHG Legal Group, Knightcorp Insurance Brokers and Bentleys that aims to educate and provide practical strategies to soften the financial impact of the pandemic as you begin to revive your business. Collectively we will discuss ways to minimise risk and find opportunities as you navigate the changing business landscape that is the post COVID-19 world.