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Speaking on Broker Daily’s Finance Specialist podcast, Accendo Finance founder Trent Carter unpacked the reality of business cash flow and some of the key warning signs brokers should look for when assessing an SME client’s funding needs.
For Carter, an understanding of the principles of financial analysis can help brokers identify cash flow pressures that can otherwise go unnoticed.
“I think the first thing brokers need to get good at is financial analysis,” he said.
“Financial analysis is deeper than understanding servicing on an EBITDA [earnings before interest, taxes, depreciation and amortisation] calculation level. I think most brokers understand how to do that. But your credit assessor, when you hand a deal across, the very first page of the financial documents they turn to is the balance sheet.
“Brokers need to get in the habit of reading a balance sheet and understanding what they’re looking at when they’re looking at a balance sheet and then asking that next level question about where the cash is going.”
This approach allows brokers to gain a clearer picture of their clients’ cash flow position, according to Carter.
“Once I understand the picture of that and I can look at the analysis over perhaps two or three years and see trends in the business that stock days have been climbing out, debtor days have been climbing out, credited days have been stretching,” he said.
“Gives me the symptom that there’s potentially a cash flow stressed business here and there’s opportunity for us to be able to assist them to get cash flow right in their business again. Some of those solutions will be behavioural, and some of those things will be debt-funded.”
What gets missed
As Carter explained, cash can become tied up across different parts of the business without being immediately obvious to the owner.
“They can see the stock on the shelves that they have to sell, but they're not accounting for the stock that's in transit,” he says.
He says this can leave businesses with cash effectively locked away in stock, invoices and other parts of the operating cycle.
“So that whole time that that cash flow sits in stock, sits in debtors or invoices to be paid, it then actually is money locked up,” Carter says.
Strategic solutions
Carter argued that the real success of a business sits on how much cash they have in the bank to do the things they want to do, when they want to do it.
“Fundamentally, in its most basic sense, that’s what cash flow is – the ability to draw on your bank account to pay for wages, pay for rent, pay for your debt repayments, pay for the GST, pay for staff and your own wages as an owner.
“The stronger the cash flow, the business, the more opportunity you've got to be able to do these things. Therefore, strong cash flow businesses have a bigger opportunity to grow unabated than a weak cash flow business. I think that's a great starting point in terms of where cash flow sits in a business, how it actually flows through a business.
“I think it's a much deeper sort of thought process.”
Need for cash flow solutions
Economic pressures are continuing to squeeze SME cash flow, with higher interest rates and rising input costs putting pressure on margins. At the same time, tighter ATO debt enforcement and changes such as Payday Super are increasing the amount and frequency of cash businesses need to set aside.
The pressure is also showing up in business debt and payment behaviour, with small business debt increasing by $19.4 billion between 2018–19 and 2024–25, while CreditorWatch reported payment arrears had reached their highest level since January 2020 in May.
[Related: Business lending growth hits 6-year high]
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