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Why strong cash flow and working capital is the best form of business credit

27 August - 4 min read

As businesses weathered what was hopefully the height of the COVID-19 pandemic last year, economic policy was relatively accomodating with central banks expanding their balance sheets rapidly (quantitative easing, or QE). The objective behind QE is that money will eventually trickle its way down the economy. However, things don’t work in such a linear fashion, especially for small businesses that already battle cash flow issues and need instant access to funds to meet their financial obligations, such as rent payments and staff wages. 

For businesses experiencing the impacts of restrictions and lockdowns, the cash generated from accommodative economic policy can ironically reach businesses — those who can invest in jobs and economic growth — last. Inflation risk rises with these policies too. As a result, the price of goods and services increase, and people may reduce personal spending if their income isn’t growing at the same rate as inflation. 

At times when the economy weakens and consumers reduce their spending, businesses will still need credit to continue operating. While credit and debt facilities help, and most businesses already have a credit facility in some capacity, strong cash flow and working capital are the best forms of business credit.

In this article, we outline a few ways that businesses can be proactive in ensuring they have strong cash flow and working capital.

Seek alternative sources of finance

According to the RBA’s liaison program and ABS data, Australian SMEs are finding it increasingly challenging to access finance through traditional finance channels. Further, younger business owners who may not yet have residential property to provide collateral especially have difficulties getting capital from large lenders such as the big banks. With traditional finance channels increasingly difficult for SMEs, business owners and leaders should look at getting capital through alternative channels and unlocking working capital in their business. 

Alternative finance channels and ways to unlock working capital may include using transaction software to pay your bills that allows for payment via credit card (even when your supplier doesn’t traditionally accept credit card payments). That way, your business can essentially unlock an additional 30 days (or more) of credit while not being penalised by your supplier (supplier trade terms + 30+ days credit card payment terms as defined by your card provider).

Regularly forecast cash flow

Having an accurate view of your short-term cash flow is important to make sure you have the capital to cover your immediate expenses. Use your accounting software or a cash flow forecasting tool to understand exactly when money is moving in and out of your business.

Spenda’s payments features integrate with small business accounting software (Xero, MYOB, QBO) as well as  larger ERP management systems so you can view how your cash flow is faring in real time. Further, with the ability to enter in payment schedules with your supplier, you’ll be able to anticipate outgoings and plan accordingly. 

Model different financial scenarios

Once you have completed a cash flow forecast, you can create a financial model to forecast your business’s longer term financial performance. The main inputs you need for your financial model are: 

  • revenue
  • cost of goods sold (COGS)
  • operating expenses
  • salary and wages, and employee on-costs (e.g. payroll tax)
  • investments in assets, and financing. 

As Oaktree Capital outlined in its recent Global Credit Panel, prices are increasing on everything from snacks to used trucks. To proactively prepare for the prospect of sharp rises in business inputs, your financial model should cover a few scenarios to see how changes will impact your cash flow and working capital.

For example, you may run a health food cafe and a large proportion of your COGS is fresh produce. In this case, look at modelling out different price increases on produce at average, above average and well above average inflation rates. Once this is completed, you can see what levers are available for your business to adjust. These levers may include increasing the prices of your products and the potential to adjust larger costs such as your rent. Remember, big adjustments to fixed overheads can impact your balance sheet, and you’ll need to make sure you account for this correctly in your financial reporting. 

Boost your cash flow and working capital with Spenda

While there are challenges in ensuring cash is flowing consistently through a business, it’s something a business can proactively manage with the right tools and systems in place. Spenda’s tech stack has a range of features that help businesses get paid faster, manage late payments and be more strategic. Integration with accounting and ERP software also means you can spend less time buried in spreadsheets and more time growing your business. 

If you’d like to see Spenda in action, why not book a demo with one of our payments experts? Alternatively, if you have any questions, send them over to and our team will be more than happy to help you out.

*This article is for general information purposes only. Consult a qualified financial advisor regarding any changes to or decisions about your business’s finances.

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