How to manage cash in uncertain times

Practical tips for managing cash in uncertain times.

Not having enough cash in the bank, or seeing your cash balance decline over time, is one of the more stressful things that a business owner can go through.

Unfortunately, this is a reality for many business owners at the moment.

According to a recent survey conducted by Xero, nine out of 10 small businesses struggle with negative cash flow at least once a year and one in five are plagued for six months with expenses greater than revenue.

Furthermore, the survey found 92 per cent of small businesses experienced at least one month of negative cash flow in 2021, and for 20 per cent, it lasted more than six months. The average small business went through 4.2 months of negative cash flow in 2021.

What is causing business owners to be caught short?

There are many reasons that this occurs.

  • It could be that you or your industry is being disrupted by a competitor,
  • It could be as a result of taking on too much debt,
  • Inflation may have reduced demand for your products or services, or it may be causing your costs to increase,
  • It could be an inventory management issue,
  • It could be a result of issues with collecting your debtors,
  • Maybe it’s a pricing issue; or
  • Due to you withdrawing too much from the business to spend on personal items,
  • It could be due to a sustained period of growth or scaling the business back up after years of lockdowns. Growth and scaling up requires an investment in equipment and time which impacts your cashflow.

It is very easy for business owners to throw their hands in the air when considering all of the reasons.

It’s often deemed too complex, or the future is too uncertain to do much about it. This results in many business owners taking the ‘let’s see how this plays out approach’ and reacting when issues arise. But from experience, there is a better way.

So, what can be done about it?

This article outlines some practical tips for you to avoid ‘getting caught short’.

Start with what you know and what you can control

As a starting point you need to understand your fixed costs. What are they? Are they going to change at all in the coming year? Has anything changed from last year?

You may have been advised by some of your suppliers that costs are increasing. You know that interest rates are on the way up. You can see if your debtor days are growing or if your competitors’ prices have changed.

You know when your Business Activity Statements are due and as a business owner you know roughly what you need from a personal perspective. There are a lot of things that you know and that you can control, so start there.

Understand your strategy

The next step is to understand what your strategy is for the year ahead and beyond.

Do you have a growth strategy? Are you in a period of sustain and defend? Are you in a period of transition? Do you have a strategy regarding your margins?

In order to answer these questions, you need to be clear on where you are going and what you are trying to achieve for the business and as owners.

Once you know what you are trying to achieve you can then start to consider how your fixed and variable costs will change based on your strategy. You can then start to understand how your business will fund your strategy which can have a big impact on cashflow.

 Use your forecast as a crystal ball

Once you understand your fixed and variable costs and how they will be impacted by your strategy, the next step is to put it all together with what you know about the timing of your cashflow to create a forecast.

The forecast will tell you the future. It will tell you if you have negative cashflow at certain times of the year and it can be adjusted to see how changes to your strategy impact your cashflow.

The forecast can then be used to help you plan and address the challenges you may be facing now and those you potentially will face along the way.

An advisor should be utilised for this process as they can look at your situation independently. Advisors will help you get an understanding of where you, your business and your family stand and what you can do to improve your situation.

Monitor, manage, and refine

Importantly, businesses and families change over time, so the plan also needs to change. To enable this, you should be monitoring, managing, and refining your cashflow constantly throughout the year.

Make sure you meet with your advisor regularly to get feedback. The more you do this, the more accurate your forecasts will become and the more confident you will be in managing the future.

The result

If you create a forecast, put together a plan to manage the unexpected, review it continuously, don’t overextend yourself, get advice, and build a buffer, then you will be on your way to never being caught short again. If you need any help, get in touch.

Andrew Ash is Director – Accounting and Tax at HLB Mann Judd

This article first appeared in the September/October issue of INCLEAN magazine. 

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