Although OCR reductions will provide some interest rate relief (with the potential for further reductions this year), it's still just as important than ever to understand your businesses’ pressure points; if cash is going to be tight, what you can do about it?
A good place to start is cashflow - how you manage it can mean the difference between survival and failure.
Cashflow is key – but don’t confuse it with profit.
Cashflow shouldn’t be confused with profit. Profit is the difference between income and expenses. This can include non-cash items such as depreciation, foreign exchange gains or losses, and amortisation of goodwill. Profit is frequently used as a measure of growth and performance in a business, but it won’t provide a clear picture of your company’s liquidity.
Cashflow, on the other hand, is the level of funds available to pay wages and bills – the lifeblood of the business. It comprehensively measures not only net cash received from business activities, it also includes debt repayments, asset sales and purchases, GST payments, and capital introduced from owners.
Forecasting your cashflow is crucial.
The timing of cash receipts and cash payments is vital. While a monthly forecast provides an overall estimate of the company’s cash requirements, it doesn’t consider inter-month fluctuations which can be material, leaving you in the dark about if and when key commitments (such as wages) can be met in advance.
Preparing a detailed granular cashflow forecast is the best way to monitor these requirements and prepare for any unexpected financial issues on the horizon. It gives you the ability to assess your upcoming cashflows to survive periods when there may be a cash shortfall, and the business can’t pay its debts as they fall due.
A range of possible outcomes can be built into your forecast to cover all areas of uncertainty that may impact your business. These potential outcomes will help you identify the need for any additional finance requirements to cover a predicted shortfall and/or necessary changes in repayment obligations to try and negate deficits.
But wait there’s more…
Cashflow forecasting also gives you the ability to assess your current practices by highlighting some ways to improve cashflow, including:
- invoicing regularly and consistently
- adding late payment charges, fees or interest for late payments
- allowing instalment payments on larger debtors
- consolidating loans to simplify repayment obligations
- paying bills on their due date unless there are discounts offered for early payment
- reviewing purchasing systems to reduce stock on hand
- reviewing supplier terms and payment timeframes
- holding a sale to move old stock
- avoiding overestimating provisional taxes
- reassessing sales prices and passing on any recent cost increases to the purchaser
- avoiding big ticket purchases in the short term and leasing instead
- expanding your customer base and increasing sales.
