Stifled cash flow the SME killer

Mismanaging cash flow is the number one cause of small business failures - and the situation may be about to get worse.

Smaller concerns are feeling the crunch as others, especially big corporates, take longer to pay their bills.

Dun & Bradstreet New Zealand general manager John Scott says the key to staying afloat is cash flow. "Every business relies on credit to some extent."

He says the most important thing to ensure business survival is to get money in before paying for goods and services.

Despite his company's figures showing the number of business failures fell by 20 per cent in the past year, he said New Zealand was not out of danger.

During the financial crisis, the terms of trade blew out and businesses took a lot longer to pay their bills. That situation started to ease when some recovery appeared possible but the earthquakes in Christchurch prompted more purse-string tightening. And small businesses suffered.

"They may have been gearing up and taking on more people, and that can lead to cash constraints. As we begin to recover, they fall over."

Australia's situation was a warning that despite brighter figures, there might be more pain to come.

"Australian business failures have surged in the June quarter with nearly 1000 insolvencies in July alone. Given that Australia is our largest two-way trading partner and accounts for $17.7 billion in total trade, it is crucial that Kiwi businesses do not take our lowered insolvency figures for granted."

Auckland Chamber of Commerce head Michael Barnett said cash was king. "Being able to manage cash out and in makes or breaks a business in its early stages."

Barnett suggested talking to a banker who understood what businesses were doing. "Managing debtors is key."

Businesses should also have a clear statement of purpose that would turn into a guide for what the business should be doing. He recommended getting an independent mentor.

Scott advised small businesses to make sure their contracts had clear terms of trade, and to do credit checks on potential customers.

"If you know someone is a bad payer, you can price the risk in. Those companies are using you as a bank, you should charge them a premium for that."