The most common challenge I see among my clients

During the last nine months of client meetings, account preparation, and tracking expenses, there is one challenge most clients have in common, and that’s cash flow. It’s a critical component of a business’s financial success, so it’s important that we keep it healthy.

Why is cash flow so important?

Operating Expenses: A business needs a positive cash flow to pay its invoices, rent, salaries, and more. If the company doesn’t have sufficient cash to pay these operating expenses on time, it could cause late payment penalties, debt collection action from suppliers, or even criminal prosecutions (e.g. not paying wages to employees).

Financing Expenses: A healthy cash flow allows businesses to effectively pay and manage their financial debts, such as bank loans. In some cases, the business owner may serve as the guarantor for the loan. If the company can’t pay the loan, the bank may take legal actions to recover the money owed, including bankruptcy proceedings, and seizing the guarantor’s personal assets.

Business Growth Opportunities: With a surplus of cash flow, the business has room to grow and expand. This means the opportunity to invest in new products or services, expand into new markets, or hire new employees. All of which contribute to increased revenue and profitability.

But with New Zealand’s current economic environment, it’s no wonder this is a common challenge for businesses. We are seeing…

• High inflation curbs consumer spending. Business sales are dropping, and some are failing.
• Interest rates have dramatically increased over the last two years, significantly impacting business expenses, e.g., rent increase.
• Business owners try to borrow funds from the Bank but can’t get approval.
• Businesses don’t have growth opportunities, so they only focus on surviving.

In the midst of all this, there are things businesses can do to improve cash flow. Let me share some tips…

Create a realistic Cash Flow Forecast: Project the inflows and outflows of cash for a given period, such as weekly, monthly, quarterly, or annually. This will help you plan and ensure you have the funds to meet your business obligations. Meanwhile, it also helps you cut costs by identifying unnecessary expenses, eliminating, or finding cheaper replacements, or renegotiating contracts.

Monitor the Cash Flow: Track the inflows and outflows of cash and compare them to your Cash Flow Forecast and act accordingly. Regularly review and analyse the cash flow forecast, considering current market movement or any trends in your business. If needed, update your cash flow forecast to reflect these changes.

Billing Policy: Send out invoices to the customers right away after you are entitled to do so, such as when goods have been delivered or the work has been done. Don’t wait until the end of the month. Be clear and concise with your customers about your payment terms and expectations.

Offer other payment options: Offering other payment options, such as credit cards or finance, can make it easier for customers to make their bills on time. This saves you the time you spend trying to receive the payment and, in turn, improves your cash flow.

Monitor Accounts Receivable: Have a system in place for tracking invoices and payments from customers. You could consider offering a prompt payment discount or implementing stricter credit terms for customers with poor payment histories.

Monitor Accounts Payable: Paying your bills on time helps maintain good supplier relationships and avoid late fees. Also, try negotiating better payment terms with suppliers. This will help your cash flow by reducing the amount of cash you need to have on hand to cover expenses.

Seek Professional Advice: If you’re struggling to manage your business’s cash flow effectively and efficiently, you may need help from your accountant or business consultant. They can provide valuable insights and guidance tailored to your specific business needs.

In summary

Cash flow is a critical component of a business’s financial health and long-term success, and is often considered the lifeblood of a business, no matter which industry you are in. If you need help to maintain a healthy cash flow, especially with the trying times New Zealand businesses are facing, feel free to get in touch with me.