#fifocapital

FIFO Capital easily met my short deadline and delivered exactly what he promised at a time when the growth of my businesses required our debtor funds to survive.

FIFO Capital's support allowed our business to grow at a rate that would not have been possible without this funding facility.

2 December 2014

THE Australian economy is picking up a bit of pace as cheaper petrol and low interest rates encourage more spending.

THE economy is forecast to have grown by 0.7 per cent in the September quarter, and 3.1 per cent in the 12 months to September, according to an AAP survey of 15 economists.

In the June quarter, gross domestic product (GDP) grew at 0.5 per cent, for an annual rate of 3.1 per cent, seasonally adjusted.

The Australian Bureau of Statistics will release the latest National Accounts figures on Wednesday.

Commonwealth Bank senior economist Michael Workman said retail spending is boosting economic growth but added that weak growth in wages and salaries could threaten a continued rise in consumer spending.

"Household consumption growth is being supported by low interest rates, higher dwelling prices and cheaper petrol," he said.

Mr Workman said housing construction was also driving the economy and the extra supply of homes would put a lid on price rises.

"More residential construction and firmer consumer spending will help absorb job losses from the mining capital expenditure downturn," he said.

"Extra housing supply will flatten house price growth through 2015, raise affordability and, with the usual population growth, prolong the construction cycle."

A report from RP Data, released on Monday, showed that price rises are already slowing.

House prices across the eight capital cities fell by 0.3 per cent in November, and were up by 8.5 per cent over the past 12 months, the slowest growth in a year.

ANZ is forecasting 0.7 per cent growth in the September quarter but has downgraded its forecasts for 2015 and 2016.

Senior economist Felicity Emmett said prices for Australia's main exports - iron ore and coal - will continue to fall in the new year and weigh on the economy.

"Overall, growth remains below trend - where it is likely to stay for most of next year given the headwinds the economy is currently facing," she said.

"We now expect below-trend growth to continue well into 2016 as a result."

However, Ms Emmett said, the good news was that housing investment remained strong and would boost retail spending in the new year as people fit out their homes.

"Dwelling investment is forecast to have posted a 1.5 per cent fall in in the third quarter, after three quarters of solid gains," she said.

"Despite this, we continue to look for residential investment to grow solidly over the next year."

ECONOMY TO PICK UP PACE IN THE SEPT QUARTER

* Sept quarter growth forecasts range from 0.5 pct to 0.9 pct

* Median forecast is 0.7 pct

* Annual rate of growth is forecast to be 3.1 pct

(Source: AAP survey of 15 economists)

BUSINESS ANGELS

When we need a quick cash flow problem to be solved for a client we call FIFO.

Whether a client needs one invoice factored, or a short term solution to get CASH –we find a call to FIFO is always worth it –FIFO wants to do business, and usually a description of the clients business, the type of invoice and business (debtor) and what we are trying to achieve means that we have a positive response.

Then the FIFO team does the work. They contact our client and work though very quickly to solve problems, get the facility in place and answer all our clients’ queries.

2 December 2014

The recent performance of Australian businesses is failing to meet their own expectations as a continuation of below-trend growth in the economy begins to impact reported activity this year.

According to Dun & Bradstreet's Business Expectations Survey, sales and earnings in particular are falling further behind the three-month projections being made by businesses.

Compared to initial expectations, the number of businesses that achieved an increase in sales during the third quarter fell from 43 per cent to 38 per cent. At the same time, the proportion of businesses that reported reduced sales was 20 per cent; more than the 11 per cent that had initially forecast weaker activity. These responses have moved the actual sales index to 18.3 points for the September quarter, short of the expectations index of 32.5 points. Upbeat sales forecasts through to the first quarter of next year have lifted the index further, to 38.7 points.

A similar trend has developed in the profits performance of businesses this year. D&B's survey has found that, while 35 per cent of businesses had expected higher earnings in the September quarter, only 27 per cent delivered. Additionally, 19 per cent of firms experienced a decline in their profits compared to the 15 per cent that had initially forecast a drop in earnings. The Q1 2015 outlook for profits is 25.6 points, marginally higher than the 25.0 points forecast at the same time last year.

According to Gareth Jones, CEO of Dun & Bradstreet-Australia & New Zealand, despite a recent divergence between expectations and actual results, businesses are gradually improving their performance and optimism remains an important factor in future growth.

"Despite a backdrop of soft external conditions and macro-economic forces, business activity this year has been steady; with our survey revealing that most indicators are up on last year's levels," he said.

"Optimism also remains strong, with 74 per cent of businesses reporting they are more optimistic about growth in the next 12 months compared to the last.

"The recent separation in expected and actual business performance, however, suggests that the business environment is, in reality, still weak.

"If this trend continues, and given the persistent weakness in consumer confidence, there is a risk that this optimism will fade, and with it a willingness for businesses to invest, employ and drive more significant growth," Mr Jones added.

D&B's Business Expectations Survey reveals a further improvement in the three-month outlook from businesses, with expectations for capital investment, employment, selling prices and sales in the first quarter of 2015 moving ahead of last year's levels, although profits expectations are flat year-on-year.

At 27.5 points the expected selling prices index for Q1 2015 has jumped to its highest level since 2009. Thirty-one per cent of firms indicate they will lift their prices at the start of the New Year, while just three per cent intend to discount and the remainder will leave their prices unchanged.

Employment expectations have edged up marginally to 14.8 points, with 23 per cent of businesses planning to take on more staff while eight per cent will cut numbers. Actual employment activity remained weak in the past quarter, with 21 per cent reporting to have hired staff while 15 per cent reduced their numbers.

Similarly, capital investment expectations have lifted slightly as 21 per cent of survey respondents indicate they will spend money on their operations in Q1 2015 compared to the six per cent which will reduce expenditure. This response has taken the index to 15.7 points, up from 7.2 points expected at the same time last year.

Finance does not appear to be an obstacle for investment plans, with only seven per cent of businesses reporting access to credit as an issue for their operations. The most commonly listed issue is cash flow (24 per cent) and the current level of the Australian Dollar (25 per cent); with wholesalers and manufacturers in particular identifying the currency's value as most likely to influence their operations.   "The optimistic outlook from the business sector remains in place, with expectations components of the survey continuing to trend higher," said Stephen Koukoulas, Economics Advisor to Dun & Bradstreet.

"What is a little concerning for the real economy is that the 'actual' results for sales, profits, employment and capital expenditure have fallen short of the upbeat outlook.

"The biggest gap between expectations and actual results are in the two most important components of the survey - sales and profits.

"The reality of a soft economic growth, very low inflation and global weakness appears to be dashing the optimism of the Australian business sector," Mr Koukoulas noted.

"It is hoped that the currently low interest rates, and more recently the lower Australian dollar, will translate into actual activity picking up over the coming quarters."

4 November 2014

This year's gradually improving business outlook looks set to continue into 2015, with the latest survey of Australian firms revealing that an increasing number expect to lift their sales and profits, sell their goods and services at higher prices, and invest more in their operations during the first quarter of the New Year.

Businesses are particularly upbeat about sales, with Dun & Bradstreet's Business Expectations Survey revealing that 53.2 per cent expect increased sales in Q1 2015 compared to last year, while just 7.5 per cent forecast a decline. This response has lifted D&B's sales expectations index to 45.8 points, up from 27.5 points last year and to its highest level since Q2 2000.

After diverging during the year, as expectations outpaced actual activity, reported sales have also increased, moving to 16.9 points for Q3 2014, up from 11.6 points in the previous quarter and 7.5 points at the same time last year.

The increase in sales expectations beyond the boost expected in the Christmas period underscores the resilience in the business sector. D&B's survey has also found that 71 per cent of businesses are more optimistic about growth in the next 12 months compared to the previous year; the strongest response recorded in 2014.

According to Gareth Jones, CEO of Dun & Bradstreet-Australia and New Zealand, the more positive business outlook for next year follows signs of gradual improvement in the local economy.

"After a 2013 during which businesses were motivated by risk minimisation, this year has been one of slowly-building optimism, while these latest figures suggest that 2015 will see more businesses capable of growth," Mr Jones said.

"Although still below trend, D&B is forecasting a lift in Australia's GDP growth from 2.2 per cent to 2.5 per cent in 2015, while a more accommodating currency level and a stronger United States economy will support business optimism.

"Consumer confidence, however, appears to be the missing piece in the recovery puzzle and one with the potential to derail the business sector's capacity to grow and drive a new phase in the economy's development," Mr Jones added.

Following two flat quarters, expectations for higher earnings have lifted to a 10-year high as 41.9 per cent of businesses anticipate improved profits during the first three months of 2015, while 11 per cent expect a decline and 47.1 per cent an unchanged result.

Profits looks set to be supported by an increase in the number of businesses planning to raise their prices in Q1 2015. While the majority of businesses expect to leave prices unchanged, 31.2 per cent intend to increase selling prices while just 4.2 per cent will discount. This has taken D&B's selling prices index to 26.9 points, up from 19.5 at the same time last year.

The slow crawl in planned business spending has continued into the New Year, with D&B measuring slight increases in expectations for capital investment and employment. 

With one-in-four businesses expecting to hire staff during Q1 2015, the employment index has lifted year-on-year from 8.8 points to 16.6 points. Similarly, the capital investment index has moved from 7.2 points to 16.8 points.

  The sales outlook is strongest in the wholesale and retail sectors, where 59.6 per cent and 60.1 per cent of businesses respectively are expecting increased trade, while the finance, insurance and real estate sector is anticipating the biggest jump in profits.

Construction sector businesses have the most active plans for employment, with one-in-three intending to take on new staff during the first quarter of next year.

"The view from the business sector is very positive, with the data on sales and profits suggesting a period of stronger economic growth into the New Year," said Stephen Koukoulas, Economic Advisor to Dun & Bradstreet.

"While the news on expected sales is very strong, there is some concern that actual figures for reported sales have fallen short of expectations - it would be disappointing if this most recent surge in optimism failed to materialise.

"The slow but steady rise in expected employment and capital expenditure readings is encouraging; these are the components of the Business Expectations Survey that need to keep moving higher if we are to be confident that the economy is moving onto a stronger path," Mr Koukoulas noted.

Situation & Funding Need

Importer of electronic goods is about to go through a seasonal high and needs funding to pay for a shipment of electronic goods. Supply a single key distributor ie one major customer, meant, that although their monthly turnover figure of approx. $500k would qualify them for a full ledger factoring facility, as they only have one customer Fifo Capital is their only option.

They plan to use Fifo for 6 months or so whilst they look to distribute direct to the retailer.

Funding need

$400k

Solution

Fifo agreed to fund the single debtor.

How Fifo Capital helped

Where a full turnover factoring company couldn’t assist due to a debtor concentration issue, Fifo was able to step in due to its debtor insurance policy which mitigated this ‘risk’.

28 October 2014

One of the reasons businesses run out of cash – and generally go broke – is that they grow too fast.

What a paradox – the business is growing too quickly and is therefore too successful for its own good!

Not surprisingly, in situations like these you also find that the largest “creditor” of the business is the Australian Taxation Office, due to either unpaid GST, PAYG withholdings, employee super or all three. In other words, the business has used the ATO as a banker. The obvious question is – why?

The broader answer is very simple – lack of access to alternative funders.

Sources of funding for your business

A typical family-owned business usually only has two sources of funding – the owners or the bank – and the latter option is generally only available if the owners have “bricks and mortar” security (i.e. their home).

Where the business owner has little or no equity in their home and/or the funding needs of the business exceeds the amount they can borrow against their home, the options tend to be very limited. Banks may still lend something against the assets of the business (e.g. stock and debtors), but the size of this facility is often a fraction of the assets pledged as security and the facility may not increase as the cash flow needs of the business increase.

Children taking over a business from their parents may also lack the amount of capital (or property security) needed to grow the business.

Family-owned businesses are also reluctant to call in a “white knight” (a friend with cash) or venture capital provider. In any case, the latter are generally not attracted to smaller “mum and dad” family businesses. This therefore only leaves two sources of funding – business creditors and the ATO. Business creditors tend to get looked after as the business owner wants to ensure supply of raw materials to their business, which just leaves the ATO.

One often overlooked source of funding may be to “borrow” against the debtors of the business through a debtor finance arrangement (previously called factoring).

How debtor financing works

Traditionally thought of as a lender of last resort, debtor finance companies should not be overlooked as a source of funding for growing businesses, provided the business is profitable. The latter point is crucial, because it is no use accessing cash flow (from anywhere) if the business is not making money. The cash will soon run out and the business will go broke. This was also another reason provided in my previous article about why businesses don’t have cash – they don’t have a cash flow problem, they have a profitability problem. A lack of cash is the symptom, but a lack of profitability is the cause.

Assuming the business is profitable and growing, debtor finance provides an opportunity to borrow against the debtor book, particularly where it is a high quality debtor book. Generally, debtor financing companies will advance a percentage of the debtor book (e.g. 75% or 80%) for those debtors who have been outstanding for less than 90 days.

So, why don’t more family-owned businesses take up debtor financing?

I suspect there are a number of reasons for this. One reason might be the perceived stigma. Often, debtor finance companies will require that the arrangement be disclosed to the customers of the business and collection of the outstanding debts is handled by the debtor finance company. Whilst this needs to be carefully managed, I do see a “good news story” in here for the business and that story should be “sold”. The business is growing! Every business owner understands that a growing business needs to fund cash. So should your customers.

Secondly, the business is “outsourcing” its debtor management, thereby enabling the owners to focus on doing what they do best – build the business. You may also find that your debtors are better managed (and more likely to pay on time) when there is greater focus applied.

Another reason may be because debtor finance is generally a more expensive form of funding than traditional bank finance secured by a property. This is not surprising – it’s more risky. If the business owner had property to put up as security then they wouldn’t need debtor finance. So it is important to understand what the cost of funds will be. Even if the effective cost of funds is (say) 15%, provided the business is making a return on capital employed (ROCE) of greater than this then they are in front. In other words, if the ROCE for the business is, say, 25% then the business owner is still in front by 10% once the financing cost has been paid. Would you rather make 10% of something or 100% of nothing?

I have certainly seen debtor financing used to beneficial effect by one second-generation family business client, where the children (who recently took over the business) had little or no “bricks and mortar” security.

Clearly, in a perfect world having access to an unlimited supply of cash is utopia. However, we don’t live in a perfect world and business owners frequently have to deal with imperfection. The challenge for business owners using any sort of funding, but particularly debtor financing is to know the key financial parameters of their business.

The big three financial ratios every business needs to know

Know your ROCE. If you don’t know this and the areas of your business that drive it, you’re driving blind.

Know your free cash flow (FCF). Work out your after-tax profit. Subtract from this the amount by which the capital employed in the business has grown during the year (or last year). If the answer is negative, you have negative FCF and this can’t be sustained forever.

Know your Working Capital Absorption Ratio. This is simply the amount of additional working capital your business will need to fund a given increase in sales. This can vary significantly from business to business. If you don’t know this and you have a growing business, you’re in risky territory, unless of course you have an endless supply of cash.   

Though there are a number of benefits to extending credit, small business owners need to be careful when doing so, especially when it comes to taking on new customers and managing payment.

To help with the process, below is a list to check-off before providing goods or services to a customer on credit.

I have:

Established a clear and easy to follow credit policy that includes any privacy statements.

Communicated my policy to employees and ensured they have understood it. If they have not, I plan to provide training sessions on the subject.

Identified the person(s) responsible for approving credit applications and for how much.

Communicated my policy to all customers and prospects.

Obtained trade references and banking information from customers-to-be.

Ordered a credit report on my customers-to-be, or existing customers applying for trade credit, to ensure that they are creditworthy and not engaged in fraud.

Set a limit on the amount I'm able to extend to customers - not too low as to restrict the quantity a customer can buy, but not too high to incur any serious cash flow problems.

Notified customers of payment terms (e.g. 30 days to pay off the account) to ensure I receive my money when I expect it.

Set up a process to continuously monitor customer accounts once the customer is on board so that you can identify a problem before it gets out of hand.

Contingency measures in place in the case customers pay late or default on payments. This can range from discussing different payment options with my customer to outsourcing debt collection.