Create a cash flow forecast

The first step is to create a forecast, which involves predicting the amount of money that will come into and go out of your business over a set period – typically a month or quarter. It can help you identify potential cash shortfalls and take steps to address them before they become a problem. By regularly updating your forecast, you can stay on top of your cash flow and make informed decisions about your business's financial health.

A forecast is a form of goal setting. It will help determine what you want to achieve in terms of your bank balance or where you need to spend your money. A healthy cash flow may also put you in a better position to increase the stream of income from your business to your household but remember to keep them separate. Your business will suffer if you treat it as your personal bank account.     

Keep track of your invoices

Late payments can severely impact cash flow. Make sure you stay on top of your invoices, send them promptly, and follow up with clients if payments are not received on time. You may also want to implement a system that sends automatic reminders to those who have not paid.

Negotiate payment terms

When negotiating contracts, consider asking for shorter payment terms. For example, instead of giving clients 30 days to pay their invoices, you could improve cash flow by negotiating a 15-day term to receive the money faster. You could also offer a discount to clients who pay early, however this short-term fix could bring long-term pain as you are “giving away” some of your profit.

Monitor expenses

Monitor your business expenses regularly to identify areas where you can reduce costs and improve your bottom line. You could also look at implementing an expense management system to help you track your expenses more efficiently. Look for opportunities to cut costs, such as negotiating with suppliers or switching to a less expensive vendor. This is incredibly important in inflationary times, as the cost of doing business goes up around us!

Two things currently hurting businesses are over-capitalisation in the form of excessive investment or spending, and over-drawing without regard for tax payments or what you can genuinely afford, so carefully consider where your money is going.

Manage inventory

If you sell physical products, managing your inventory can significantly affect cash flow. Too much inventory ties up your cash, while too little can result in lost sales. It is critical to find the right balance and regularly monitor inventory levels. Consider using inventory management software to help you track your stock and make informed decisions about purchasing and stocking levels.

Consider financing options

If you are experiencing cash flow issues, financing options could help you bridge the gap. There are several options, such as business loans, lines of credit, and invoice factoring. You can even finance your tax payments with IRD-approved “tax intermediaries”.  Do your research and choose the option that works best for your business.

Plan for seasonal fluctuations

Plan ahead if your business experiences seasonal cash flow fluctuations. For example, if you own a retail business that has a significant increase in sales during the holiday season, you may want to plan for increased inventory levels and additional staff during that time. Additionally, setting aside cash reserves will help you manage any shortfalls during slower periods.

Review your pricing strategy

Your pricing strategy can significantly impact your cash flow. If your prices are too low, you may not generate enough revenue to cover expenses, but if your prices are too high, you could lose customers. Review your pricing strategy regularly and make adjustments as needed to ensure that you are generating sufficient revenue to cover expenses.

It’s heartening to see that a lot of businesses are doing what they need to do, which is passing the cost onto their customers when expenses go up.

You can see why it’s an inflationary environment – everyone’s increasing their costs – however these aren’t wholly unprecedented times for New Zealanders, businesses and the economy. We had a sensational period for borrowing and people probably got too used to the good times, but you don’t have to go back too far in history to see higher interest rates and other turbulence that affected the economy.

Sound business practises and good financial decision-making are key to riding this out – and our business advisors, tax specialists and other expert teams are here to help!