February 20, 2023

Small Business & Cash Flow Pressures


Claire Bryant

Small business pressures on the up, cash flow certainty on the out?

Small businesses are in the coal face of economic changes and consumer sentiment. We often see small businesses secured with a mortgage over their family home, or funded off the back of personal savings, and always with a vision to support their customers, family, and the family of those they employ.

Small business has endured challenging times in recent years, and while support has been made available through the likes of the IRD Small Business Cash Flow Scheme and various wage subsidies, we are now seeing the symptoms of cash flow issues arise as the support runs out.

At the same time, pressures on small businesses have continued to mount, including a 50 basis point increase in the OCR on 5 April 2023 affecting both household and business interest rates and rising costs as inflation is felt. Xero’s latest Small Business Index monthly update has also identified a reduction in sales as consumers tighten their wallets, as well as an increase in average payment days showing cash flow stress among small businesses.

Given that demand is tightening up and the cost of being in business continues to rise, there’s never been a more important time to understand what strains and restraints exist within your cash flow and what resources are available to maximise free cash flow so that you can achieve your business goals.

Here are 3 steps you can take to improve your business’s cash flow and how we have helped our clients to implement improvements in their businesses:

1. Understand your immediate cash flow needs.

Good cash flow planning starts with understanding the current demands. Preparing a short-term cash flow forecast allows you to see the ins and outs over the next 30-90 days, determine a breakeven cash flow position, and map out strategies to 1) manage, 2) refocus on key business drivers, and 3) relieve stress by providing a short-term roadmap.

This is also an important conversation starter to determine if the business needs additional funding. For example, we’ve helped our clients secure short-term financing solutions, from temporary overdraft extensions to term loans, in as little as a week due to holes identified in the short-term cash flow.

2. Don’t assume your current bank has the best deal.

Banks are trading companies, and they compete for new customers through their interest rates or product offering. We often see small business owners either assume they can’t get a better deal at another bank or don’t want to risk their existing banking relationship despite receiving a lack of support for the business’s future goals.

We have relationships across the major trading bank network and can help you to navigate those conversations with your existing bank or with a different banking partner that better suits your needs. We also know what the banks want and can back your business story with numbers to support it, and the best place to start is with a three-way cash flow forecast.

3. Prepare a three-way cash flow forecast.

The old saying goes that profit is vanity, and cash is king. A three-way forecast integrates your Profit and Loss budget with a Balance Sheet and Cash Flow Statement forecast typically over a period of 1-2 years. This shows the direct impact of your profitability on the cash flow requirements of the business and provides a roadmap to identify vulnerabilities or opportunities and make decisions to improve or appropriately utilise cash flow.

Here are some examples and ways we have worked with clients to get different outcomes:

  • Reduce interest costs: For one client, we were able to refinance term loans from various lenders, including high interest-rate debt (exceeding 15% p.a), to one consolidated term loan and reduce interest costs each month by over a third.
  • Secure the right lending product: We secured a trade finance facility for an importer client to smooth the timing of cash receipts and payments.
  • Schedule returns to shareholders: For another client, we determined a supported level of dividends and when the cash flow allowed for the physical payment, so shareholders could better plan their personal affairs.
  • Maximise stock turnover; For a retail client, we provided support for the additional stock purchasing required ahead of the Christmas trading period.
  • Plan the timing of tax payments: As part of the process we look at how best to manage the timing of the tax we forecast will be owing, using tax pooling intermediaries to spread payments so that you don’t have lump sums due during periods that you have less cash available, or need your cash, such as our retail client above.

Next Steps

We want to see small businesses in New Zealand succeed, whatever their definition of success. We believe inadequate cash flow is a symptom of issues in the business, not the cause, so it’s always a good time to get on top of your cash flow.

If you would like to chat about your cash flow with one of our experienced team members, feel free to contact us.