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Financial management: When the going gets tough, do the tough get going?

26 March 2015

When faced with times of financial strife, some businesses falter while others fight. Managing business finance can be difficult, requiring strategy and resourcefulness.

Effective financial management involves identifying good sources for money. Many businesses don't realise invoice financing is an excellent source for money, especially because it quickly pays almost 80 per cent of outstanding invoices. This means the business can carry on operations without waiting around for invoice payments to trickle in. 

Unfortunately, Australian businesses have a very bleak outlook on business growth and profitability at the moment. Roy Morgan Research's latest business confidence survey, released on March 10,  found Australian businesses are feeling extremely pessimistic about 2015. The confidence levels last month dropped by 22.5 per cent from the peak in October 2013.

Norman Morris, the industry communications director at Roy Morgan Research, said these numbers were "casting a shadow over the country's economic growth prospects". He underscored that this lack of confidence is negatively affecting investment in expansion, with the number of businesses interested in expanding this year dropping to below September 2012 levels. Moreover, the Australian Bureau of Statistics found that 266,720 actively trading businesses closed down last year.  

In light of these pressing numbers, it is important to ask if your business is making the most of finance sources. Options include both external and personal avenues, however some are safer than others. Are you equipped to get going if the going gets tough? 

Using personal funding 

The Australian treasury's 'Small Business – Key Statistics and Analysis' report from 2012 found 72 per cent of nascent firms turned to personal savings as a major source for funding. Personal credit cards were used as another key source by 21 per cent, while 12 per cent of business founders' utilised personal secured-bank loans.

Generally, using such funding sources puts your personal assets at risk. Your home equity, lifetime savings and personal property can become collateral if things go awry. It is far safer to use external sources such as debtor financing to avoid this problem. 

Seeking external business funding

Interestingly, the same 2012 report from the Australian treasury found some businesses are more open and willing to seek external funding than others. This is particularly evident in nascent firms that were formed by teams (33 per cent), businesses which use high technology (30 percent), and those that are product-based (29 per cent). Seeking external funding to manage invoices and payroll financing can help maintain a steady cash flow for both nascent firms and steady businesses.