Is cashflow a constant struggle?

Good cashflow is critical to the success of any business, yet for many small to medium NZ businesses this is a constant struggle.

One of the key issues affecting cashflow is the ability of your business to make good, sustainable sales. A few years ago many businesses were facing a downturn in sales … leaving them struggling to keep good cashflow levels. Things have changed – the economy’s picking up … there’s more business being done and more sales being made. Yet many businesses are still facing cashflow issues.

Businesses go broke in boom-time too

Just because your business is making sales hand over fist, doesn’t mean you don’t have to keep an eye on your cashflow. It’s just as important now as it was when things were tight.

Chances are you’ve taken on more staff, bought more equipment or machinery to cope with the extra business. You may be more “highly geared” now that you were before, so that even a drop of 10% in sales can mean serious trouble.
Did you know that more businesses go broke coming out of a recession going into one?

If your business has high borrowings you may be particularly affected. You might be stuck with high or climbing interest rates with your home or other assets exposed if you go belly-up. It’s not a good position to be in.

There are ways to avoid all of this. You could work out another deal with your banker, or change banks, getting a lower interest rate and perhaps structuring your borrowings so in effect you become your own banker.

Eyes on your cashflow

The key thing in all of this is keeping both eyes on your cashflow. This is vital if you’re going to maintain liquidity and profitably in turbulent times (be it an upturn or downturn in business). It doesn’t need to be complicated. Even an excel spreadsheet can provide a simple cashflow forecast so you can see how you’ll be tracking in the weeks or months ahead. There’s no excuse for not having this information available at your finger tips – on a daily basis if necessary.

Keep constantly abreast of what’s happening with your cashflow. Make sure you forecast your cashflow well in advance – at least 8 weeks, with 13 weeks being the optimum. Check your expected income and outgoings on a weekly basis and compare them to the actual results. This will give you early warning signals for any potential problems so you can deal with them before they eventuate. Make sure you react effectively and efficiently to those warning signs.

Keeping a close eye on your debtors is essential. Don’t be scared to ring your “best” customer if their payments are dragging a bit. Keep up the “pay on time” culture, as if you let it slide you’ll end up in a situation neither you nor your “best” customer wants to be in.

At any time when change is happening (such as an upturn in the economoy) be ready and willing to adapt. Of equal importance is keeping your eyes on the numbers, forecasting your cashflow well in advance and keeping your debtors current.