THE bad news for mining suppliers and contractors is flowing thick and fast, but there are ways companies can ensure the cash continues to come in. Tracey Cook investigates.

The good news for the sector is that there is still an estimated $A67 billion worth of mining and energy projects underway in Australia.

However, the Australian Bureau of Agricultural and Resource Economics has warned capital expenditure on energy and mining projects is slumping. It has fallen 4% in the past six months.

For the mine supply sector this is already translating into fewer sales orders and more competition.

Mining and Energy Services Council executive officer David Wallis acknowledged that lower commodity prices would feed through to suppliers.

He suggested businesses take advantage of the slower business conditions to develop skills, equipment and systems. He also advised suppliers to start focusing on other business areas of the resource sector, such as introducing retrofit infrastructure and system changes that yielded efficiency improvements.

“There is going to be an enormous amount of shutdown maintenance work, where people are actually trying to develop more cost-effective ways and adding systems that make their mining operations more cost effective,” he said.

“That’s where suppliers to the market really need to focus on.”

A recent Australian Industry Group and American Express survey of 355 small and medium-sized enterprises revealed companies in the manufacturing, construction and services industries were slashing costs, axing capital expenditure and cutting jobs in a bid to stay afloat during the downturn.

Nearly 18% of respondents complained that raising finance – corporate debt, overdraft facilities and equity raising – was more difficult over the past year.

Institute for Factors and Discounters of Australia and New Zealand secretary John Bills believes this squeeze on cash flow has generated fresh demand for the niche area of receivable finance.

This specialised lending practice allows cash-strapped companies to sell their unpaid invoices at a discount of up to 80% in return for cash.

“There has been an increased inquiry level for receivable finance, or factoring and discounting, due to the credit crunch and global financial crisis causing more people problems in accessing funds,” Bills said.

The turnover in the receivables finance industry – which is dominated by the big four banks – is expected to reach $66 billion this year, a 20% increase on 2007. In 1997 the market was worth $5.2 billion.

Bills said in most cases people regarded their unpaid debt as a problem, but for many companies unpaid debt could be a big asset on their balance sheet.

“This is a way to see it as an asset and get money for it straight away,” he said.

However, CPA Australia business policy adviser Gavan Ord warned businesses considering receivables finance to read the fine print.

“Be careful,” he said. “Some factoring arrangements or debtor finance arrangements are only a short-term supply of cash.

“The debt does not actually transfer to these companies, they just provide you with a short-term cash injection based on your debtor book.”

Another downside of the arrangement is that it requires businesses to pass on client details to a third party, which may threaten client relationships.

For most businesses, large and small, managing accounts in a downturn requires a fresh focus on cash flow.

The CPA advises that in order to improve a business’s cash position, managers need to understand what their actual cash position is. This involves preparing regular cashflow forecasts as an accurate cashflow projection can alert managers to trouble before it occurs. Depending on how severe the financial situation is, cashflow forecasts should be created once a month to once a day.

“You have to look at how you can improve your cash position. Of course you need to generate cash through sales but that does not mean you undersell your products or undercut the market to get the cash in as you might actually lose money,” Ord said.

Instead he recommends businesses sell off obsolete or soon-to-expire products and install more popular and profitable products that have a quick turnover. He said this should be combined with a more focused marketing spend.

During a downturn, sales staff is the first line of offence and they need to be pounding the pavement meeting new clients and making sales.

Ord said sales staff should only receive sales commission when payment for the sale had been received in order to encourage them to target clients who will pay and to actively get clients to pay.

“Sales staff work on commission, for them there is incentive just to make the sale but that does not mean the cash comes through the door,” he said.

Extending terms of trade with suppliers, controlling costs and chasing up unpaid debts are other ways of creating more breathing room on balance sheets.

Ord said businesses should be chasing up debts regularly in the current economic climate.
“Even before they fall due, even if it is a phone call to your client and it could be just part of a relationship-building exercise,” he said.

In addition, he believes debt collection, receivable finance or legal action should only be considered after a business fails to collect unpaid debt.

The final word of advice from the CPA is that management should not shy away from asking for help from their financiers.

“Don’t hide your problems from the bank. If you have a problem, go to them early as it is much easier to get an extension on your current facility if you go to them earlier,” Ord said.

“If you go to them too late, the risk to the bank extending the facility is higher and the bank less likely to give you access to the extra money.”

This report was originally published in the December edition of Australia's Mining Monthly magazine.

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