Business smarts TAX & FINANCE
Why cash is king With less money moving around the economy, keeping a close eye on your cashflow will help prevent your accounts running dry, advises Brett Crombie. AUTHOR: BRETT CROMBIE, STRAIGHTEDGE ACCOUNTING
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wo recent reports from Stats NZ caught my eye. First was the building consent data*, which showed that in the year to July 2023, the number of new dwellings consented across the country was down 14% on the previous year. Another was the retail trade survey**, which measures the sales by businesses that provide household goods and services. This showed that for the three months to June 2023, spending across the country was down by 0.2% on a seasonally adjusted basis. The picture painted by these declines is that business conditions are tightening across the country. The impact on trade businesses will be mixed, and some will be unaffected. However, these stats show there is less money moving around the economy, putting pressure on sales volumes, profit margins and cashflow.
Cashflow pressure points The old adage ‘Cash is King’ is especially true when business conditions tighten. In my experience with trade businesses, there are three particular times of pressure when it comes to cashflow: 1. The 20th of each month Many trade terms are based around payment being due on the 20th of the month. This can put a squeeze on. When your business has bills due on this date and your clients are a couple of days late in paying your business, cashflow needs to bridge the gap. 2. Payroll due date Staff need to be paid on specific dates. This can be a challenge for businesses with irregular revenue, including trade businesses working on larger jobs that are only invoiced following completion. 3. Post-holiday periods The months of January and February are tight for a lot of trade businesses. The Christmas and New Year holiday period takes a bite out of productive days, meaning billings are often quite low in those months. Payroll, leases and other overheads continue through this period despite
the lower income. This post-holiday cash squeeze often continues until the month of March or April, by which time cash from fully productive months is flowing again.
Cashflow improvement actions To improve cashflow I recommend trade business owners start with three focus areas: 1. Cashflow forecasting A cashflow forecast is a calendar showing the expected monthly cash inflow and outflow for the upcoming 12 to 24 months. This is a critical tool for trade business owners and the three pressure points mentioned above should be kept in mind when completing the forecast. As well as producing the forecast, it needs to be updated at least monthly or as new information comes to light. For example, if a job is taking longer to complete than expected, the cashflow forecast should be updated to show the cash inflow from that job will be delayed.
The impact on trade businesses will be mixed, and some will be unaffected. However, these stats show there is less money moving around the economy, putting pressure on sales volumes, profit margins and cashflow. 2. Invoicing and debtor management Getting cash into the business first requires sending a customer an invoice. Delays in issuing invoices result in delays to cash inflows, as well as increased risk of debtors not paying at all. Issuing invoices promptly should be matched with prompt debtor management. This means following up on any invoices unpaid by the due date, ideally with both an email and a phone call. Leaving it weeks
or months before chasing unpaid invoices is bound to cause cashflow problems. 3. Inventory management Having cash tied up in inventory is a common reason why businesses can be profitable, but still run out of cash. A good inventory tracking system will keep stocks to a minimum while making sure not to run out of key items. By reducing inventories, the business will free up cash while reducing the likelihood of inventory becoming obsolete, lost or damaged.
ABOUT THE AUTHOR: Brett Crombie is a trade specialist accountant at Straightedge Accounting. For assistance developing a business plan, or for tax and accounting services, contact Brett on 021 301 022 or email brett.crombie@straightedge.nz
* www.stats.govt.nz/information-releases/building-consents-issued-july-2023 **www.stats.govt.nz/information-releases/retail-trade-survey-june-2023-quarter
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