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Given the slowdown in the economy and low business confidence, many businesses are struggling as cash flow becomes increasingly constrained. With this increasing pressure on businesses, it is important to manage your cash flow carefully.
With this added pressure, we have noticed an increase in the number of businesses seeking advice about how to manage their cashflow more effectively.
Many New Zealanders are reducing their spending to cope with the rising cost of living, creating challenges for businesses as consumers cut back on non-essential items.
According to Stats NZ, the total volume of retail sales dropped 1.2%, around $379 million, in the June 2024 quarter (after adjusting for price inflation and seasonal effects). This movement continues the downward trend observed in the last two years.
Cash flow is the movement of money into and out of your business. Positive cash flow means you have more money coming in than going out, which is essential for covering expenses, investing in growth, and ensuring the long-term viability of your business. Negative cash flow occurs when money going out exceeds money coming in, which can lead to financial strain.
Businesses, particularly seasonal ones, must manage cash flow effectively to navigate fluctuations in revenue. Seasonal businesses may experience periods of high income followed by times of low or no income, making it crucial to have a solid cash flow strategy in place.
Along with your Profit & Loss Statement, cash flow is a key indicator of your business’s financial health. Even if your business is profitable, you can still struggle to pay bills and suppliers if you are cash flow negative. This is why the old saying ‘cash is king’ holds true, careful management of your cash flow is an integral part of the success and survival of your business.
Those who are struggling need to carefully assess their business model to identify what is blocking their cash flow.
1. Review cash flow management
Conducting a regular analysis of your cash flow can help you to understand your financial position. This helps in anticipating potential shortfalls and taking pre-emptive action. Create detailed budgets and forecasts to plan for these shortfalls. Adjust your spending based on these projections to maintain positive cash flow. Looking into costs versus profitability or looking at which products are no longer working can be a good place to start.
2. Invoice regularly and make it easy for clients to pay you
Your cash flow comes from invoicing so ensure that you do this regularly. Utilize accounting software to automate your invoicing process. Consider offering a small discount for early payments.
Make it easy for your clients to pay their invoices. Add a ‘Pay now’ button to your invoices for online payment or make use of mobile payments options where you can get paid on the spot.
3. Monitor ageing debtors
Watch out for ageing debtors and chase up on any overdue invoices immediately after they fall due. The old saying “the squeaky wheel” applies here so make sure you follow up to avoid payment delays.
For clients facing financial difficulties, consider offering structured payment plans to facilitate collections while maintaining customer relationships.
4. Manage your inventory
Too much inventory ties up cash that could be used elsewhere in the business. Conduct regular reviews of your stock levels to avoid over or under stocking and consider selling excess inventory to free up cash. Consider implementing an inventory management system such as Just-In-Time (JIT) to reduce holding costs.
5. Communicate with your bank and suppliers
If cash flow is tight, keep up communications and maintain strong relationships with your bank, IRD and suppliers. The earlier you enter discussions with these parties, there are likely to be more solutions available to assist your business through this time. This assistance could be in the form of additional banking facilities or setting up payment plans with IRD and suppliers.
If your business is noticing issues with cash flow, it is better to seek professional help as early as possible so that a full analysis can be conducted by an expert and solutions can be put in place to solve issues before they snowball. If problems are identified early then often businesses do not go down the path of insolvency.
Effective cash flow management is vital for success. By understanding your cashflow, you can ensure your business remains financially healthy and resilient. Proactive cash flow management not only helps in navigating tough times but also positions your business for growth and long-term success.
Bringing in someone with a fresh perspective and putting everything out in the open for review can lead to a positive turnaround for a business.
Nexia New Zealand provides cash flow planning, support and management for businesses of all sizes including SME’s, non-profits, start-ups as well as large enterprises. Please reach out to one of our trusted Nexia Advisors if you would like to discuss how we can help your business with your cash flow.
Who are Nexia New Zealand? Nexia is one of New Zealand’s best full-service chartered accounting and business advisory consultancy firms offering the full range of accounting, business advisory, tax, audit, and insolvency services.
Nexia New Zealand has four offices throughout New Zealand: Victoria Street in the Christchurch CBD, Albany on Auckland’s Northshore, Newmarket in the Auckland CBD and Hastings in Hawke’s Bay.
We have specialist Tax, accounting, Corporate Advisory, Business Advisory and Turnaround, Restructuring & Insolvency teams across a number of industries including; rural, agribusiness & agriculture, retail, franchising, medical, property & construction, and hospitality.
