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You’re not alone if you feel like your business is sailing close to the wind financially. This is the time of year, with short months and summer holidays when cash flow can be a real struggle.
A survey by the business advisory firm, BDO, found that 49% of business leaders have been experiencing negative wellbeing due to growing concerns about business financial pressures.
Among over 560 business owners, only 48% felt positive about their business's financial performance with 56% expecting financial pressures to worsen in the next 6 months (the report applies the World Health Organisation WHO-5 Index to measure wellbeing over 2 weeks in October 2023).
BDO advisory partner, Kimberley Symon, suggests refreshing your business strategy and looking at financials holistically.
“Often taking small, measured steps with the right support around you, can help business leaders feel more confident and in control,” she says.
It may be time to refresh your business strategy, she suggests. The business landscape has changed a lot in the past few years, but business strategy may not have. Does it still align with today’s operating conditions? As well as looking at your overall business vision, what are your business’s strengths and weaknesses and are there any potential opportunities or threats?
She recommends outsourcing projects and roles and thinking about areas where you can predict cash flow fluctuations. Virtual CFO services can take the stress out of business financial management and offer specialist expertise.
1. Check your working capital
Your company’s working capital is very important, says Sarah Walker, regional councillor for CA ANZ (Chartered Accountants Australia New Zealand) and a chartered accountant (CA) with Epplett & Co. The specialist in supporting new businesses with tax advice and planning says many businesses are structured on debt and high fixed costs.
“They borrowed the money for the business, buying plant and equipment which they make monthly repayments on or a lease payment, and when the cash isn’t flowing from customers, it can become a problem,” says Sarah.
During COVID lockdowns, the companies that had working capital and weren’t structured on debt were the ones who came through well, notes the accountant. Those with hire purchases and debt to pay suffered more and took longer to rebound.
2. Review the business environment
The CA sits down every quarter with small business clients and reviews their business environment with them. This involves looking at what’s happening in the market, is pricing correct, KPIs, and what should the wages to revenue ratio be. She’ll ask questions like, if you’ve made wage increases, have you increased sales prices? What are your competitors doing?
“I’ve had clients who’ve had a big price hike from their supplier,” she says. Her advice is, don’t wait, go and deal with it.
“That’s where I’ve seen clients go under when they’ve got fixed price contracts but then their prices go up. How do you make a profit? It’s about making sure you understand how those things," says Sarah.
Review what’s making good money in the business, she adds. “In food manufacturing, you see all the time, they pull different products because they’re not making money on them, so why would they continue?” So many businesses don’t go back and review why they’re not making money, she finds.
It’s all about business owners valuing their time and effort in cash, says the chartered accountant.
Sarah works with clients on forecasting, helping owners understand how long it will take to convert a service or product into cash.
3. Manage slow-paying customers
There will inevitably be some customers who are slower to pay their bills than others.
One way of tackling irregular payments is to offer clients multiple payment options, suggests Sarah.
A “pay now” button on their invoice with a credit card, or the ability to pay off a bill, breaking it down into portions, are ideas. Be clear with customers about the terms of trade, such as the need for upfront payments due to staff and material expenses.
Craig Nevatt, Director, and chartered accountant of a registered CA firm, Drumm Nevatt believes many Kiwi businesses give their customers too much time to pay bills. The 20th of the next month is implausible, says Craig. It should be within 7 or 14 days, especially if your business is delivering a product.
When you've got staff to pay, you want to minimise the days you're covering their wages before being paid by your customers," he explains.
Tradespeople should be asking for 50% upfront and the other 50% on delivery, so they’re not out of pocket in paying for the product, he says.
4. Put money aside for tax
SME owners may be very good at their work, but they aren’t generally very good at putting money aside for taxes, the accountant sympathises.
“If you don’t have the money put aside to pay the GST at the end of a GST cycle then that can knock you over very quickly,” Craig says.
The vast majority of Craig’s small business clients at Drumm Nevatt are on 2-monthly GST returns rather than 6-monthly, so the amount to be paid doesn’t become insurmountable.
To have a financial buffer is always what you want, ideally but it’s not the reality for many Kiwi businesses.
“Most SME owners we see are living month to month. It's enough for them to support their families this month and to pay the mortgage. Just because you own a business doesn’t automatically make you rich,” says Craig.
5. Don't be afraid to ask for help
There is no doubt that the summer holiday months of December, January, and February are especially challenging for small businesses in terms of cash flow.
“It's getting to the end of February, and you haven't done much work in the past two months, so you have to tighten your spending inside and outside the business,” says Craig.
Several triggers can take a previously financially sound company into one with some serious cash flow problems. It might be when a company owner thinks someone else is running the business for them and they don’t have controls in place.
Or a business owner might get injured on the job and can’t work for some time so cash flow becomes constrained.
Financial illiteracy is quite high in New Zealand, says Craig Melhuish, (Craig M) partner at Nexia, who leads corporate advisory and turnaround, restructuring and insolvency at the accounting and business advisory firm.
“They might be a really good builder who falls into business ownership they’re not trained for. So right from the start they need to work with a qualified accountant,” he explains.
Just relying on your online accountancy tech platform to keep you on the straight and narrow won’t be enough if your financial literacy isn’t top-notch, he warns. Online accountancy platforms like Xero are a tool, but they’re not the whole solution. And the account information on these platforms is only as good as the data you’re putting in, he warns.
When Craig looks at a company’s accounts from an automated accountancy platform, there’s often incomplete or wrong coding. “We see that all the time as liquidators, we go to a Xero file and it’s just hopeless, nothing is coded,” says the Nexia partner.
New Zealand SMEs are also historically undercapitalised, says Craig M. Many new business owners will set up a company, issue 100 shares and hope any growth is going to be funded out of cash flow.
Some, like the recent demise of online supermarket retailer, Supie, relied on investors in their growth phase and their success depended on them scaling up, but then their growth faltered.
If you think you’re heading towards insolvency, you need to go and seek advice from a good accountant and possibly a commercial lawyer, recommends the Nexia partner. Their fees are worth paying, he says.
*We hope this article has provided some helpful information. It is not intended as a complete guide, nor does it consider your individual needs or situation. You should always seek independent advice.
