How to manage your small business cash flow


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After comprehensive planning you've decided to sack your boss and take the plunge into small business.

his is a significant decision, which 20,500 new entrepreneurs made between June 2013 and June 2014, according to the Australian Bureau of Statistics.

The decision to start a business should never be taken lightly and it's essential to understand the time-worn advice that "turnover is vanity, profit is sanity, cash is reality". But what does this mean?

small business cash flow

"It means that for new small business owners, cash flow management is your new best friend," says Jonathan Perry, manager of marketing and business development at Canon Finance Australia. "Many profitable and seemingly successful businesses have failed because cash flow has faltered."

Good cash flow management, in simple terms, means understanding every inflow and outflow, according to Perry, and it starts with the office and IT equipment.

Whether you're starting a consultancy firm, real estate agency or motor repairer, some basic office equipment will be required. A popular laptop such as a 14in Lenovo Yoga 3 with Windows 10 and Microsoft Office will set you back about $1400, according to retailer Officeworks.

A printer such as the Epson WorkForce WF-3640 colour inkjet multifunction retails for $198, while $297 will buy you a decent ADSL router such as the Netgear AC1900 wireless R7000 Nighthawk.

Expect to pay around $500 for an ergonomic desk and chair combination. In total, about $2400 will cover the basic office equipment - and more if you have multiple business partners and employees.

Small business office equipment: lease versus loan

Accountant Katarina Vencel, of Sydney-based Vencel Associates, says funding business equipment should be a cut-and-dried decision for most start-ups.

"You might pay a little more for the equipment with a lease due to extra interest payments," says Vencel.

"However, the interest is tax deductible and the business will have better cash flow from the outset." Perry agrees: "For many businesses, leasing provides an alternative method of financing an asset where the capital cost may otherwise be prohibitive."

As a rule of thumb, size matters when it comes to commercial leasing deals, according to mortgage broker Marshall Condon, managing director of Mortgage Choice, South Yarra. "Interest rates for leasing office and IT equipment range between 6% and 8%," says Condon.

"What a business pays depends on the age of the equipment, the extent of the warranty and the after-sale service - and if you borrow more money, the rates will be more competitive."

The rub is that many business start-ups will be ill equipped to apply for commercial finance.

"A lender will want to see tax returns or a decent deposit before rubber-stamping a finance application," says Condon.

"The lender wants evidence that a small business can meet the repayments, whether it's a lease, overdraft, credit card or personal loan. This situation is even harder since the big push by the Australian Prudential Regulation Authority to ensure that consumers and commercial entities are able to evidence serviceability of their debts."

Entrepreneurs could circumvent the stringent commercial lending environment by tapping their home equity to finance business equipment, especially with mortgage interest rates at all-time lows.

This will usually involve extending a mortgage to cover start-up business costs. However, it's a strategy that comes with a level of financial jeopardy should the business go belly up.

"People prefer to use a lease because it's putting the risk of foreclosure on the business asset instead their home should something go wrong," says Condon.

Apply for finance first

Be sure to apply for finance before taking the leap of faith into a start-up venture.

"If it's a new business, it might be better to apply for a loan or lease while you're still in paid work," says Condon. "To obtain approval for business finance, you will need to prove some level of income or cash flow. Having a job will help.

"To ensure you can successfully apply for the level of debt you need, use your wage or salary as cash flow evidence before quitting your job. Go to the lender after leaving work and the odds of getting a lease or a loan will be much longer."

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Anthony O'Brien is a small business and personal finance writer with 20-plus years' experience in the communication industry.

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