Case study scenario: business cash flow

Case study

The profit and loss doesn’t always tell the whole story


The brief

The partners of an engineering consultancy realised their business was drawing heavily on its overdraft – yet they were achieving an annual profit of $650,000 on $2.5 million in revenue. They tried reducing their monthly income requirements to relieve the financial stress, however this wasn't a viable long-term solution. They asked their Macquarie Relationship Manager to take a closer look at the balance sheet.

The challenge

The problem was soon revealed to be a much higher debtor level than they had realised – it had increased by more than 20% to $865,000. What was more surprising was the aged debtor profile - three of their large clients, as well as some smaller clients, were taking much longer to make payment. In fact, 40% of their clients were now paying them between four and five months after invoicing. The client wanted to reign this in without jeopardising their client relationships.

The Macquarie difference

Working with Macquarie, the client initially increased their overdraft limit by $100,000 to reflect the actual payment terms they were seeing. They accepted discounts on the smaller debtors to receive immediate payment, which resulted in a minor write-off of profit, but was balanced by the reduction in overdraft interest. Importantly, they also developed a formal collections policy, charging 10% interest on outstanding amounts once past 60 days.

The outcome

Six months later, their smaller clients are now all paying within 60 days of invoicing. The larger clients, while not paying within 60 days or paying interest, are on formalised terms to pay within 100 days. Debtor levels have reduced to the previous benchmark, and the $90,000 improvement in cash flow allowed them to repay some of the overdraft and recoup some of their reduced drawings.

3 tips to manage your cash flow:

  • payment terms: develop a formal collections policy to ensure clients pay on time
  • forward planning: work out when cash will come in and when it needs to be paid, so you know when you need cash on hand and can make that available
  • talk to your bank: review your current cash flow position and discuss options, such as an increase in your overdraft or an automatic payment system to collect client payments.
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This fictional scenario has been included for illustrative purposes only, without taking into account any individual’s personal objectives, financial situation or needs.

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