Keeping your cashflow strong in tough times

Small businesses are particularly vulnerable in tough economic times.

When sales are slow, there are still overheads and salaries that need to be sorted.

At First Class Accounts Ovens and Murray, we understand that the key to staying afloat and continuing to thrive during this time is pre-planning and forward thinking.

Here are some tips to help your business thrive in these difficult times:

Get a clear picture of your payroll and planned expenses

It's important to have a detailed understanding of your business's expenses so that you can plan for any potential shortfalls.

Make sure you have a clear picture of your payroll, and any other planned expenses that will need to be accounted for. If there’s even a possibility that there could be a shortfall, it’s essential to meet this head-on.

By forecasting and budgeting meticulously, you'll be able to better understand how you're placed to weather financial strains if or when they arise.

Invoice early

Sending invoices as soon as possible and in advance can help you receive payments sooner. By proactively billing your clients or customers, you increase the chances of receiving payment promptly. Offering a retainer or similar deal to regular clients or customers can also encourage them to book services or make purchases in advance, providing you with a cash flow boost.

Chase payment 

It's essential to follow up on any outstanding payments during tough times. Maintain strong communication with your clients and proactively remind them about their unpaid invoices. By initiating conversations and expressing the importance of timely payment, you can encourage clients to settle their dues promptly. Read 6 secrets to getting prompt payment here.

Talk to suppliers

A little honesty can go a long way. Being honest with your suppliers about your financial situation can lead to more flexible arrangements. Openly communicate with them and explore the possibility of extending a line of credit or negotiating alternative payment terms. Suppliers who value an ongoing business relationship may be willing to work with you to find mutually beneficial solutions.

Review Inventory

Evaluating your inventory can help identify potential cost-saving measures. Look for local suppliers who may offer cheaper alternatives, reducing shipping costs. Additionally, consider discussing alternative products with your suppliers that could help you lower expenses without compromising the quality or value you offer to your customers.

Review your costs

It’s also a good idea to do a general review of expenses. Business costs can creep up, and it’s a great idea to make a time to check on your expenses regularly, no matter what your financial situation. Review all of your regular payments and subscriptions as well as upcoming costs. There may be travel, functions or purchases which you can decide on an alternative approach to.

Talk to the bank or tax department

If you're experiencing tight cash flow, it's important to initiate early conversations with your bank and tax department. By discussing your situation, you can explore available options for financial assistance, such as credit facilities or tax payment extensions. Proactive communication allows you to put necessary arrangements in place and ensures you have the support needed to navigate challenging times.

Need help? 

We can help you implement strategies to protect your business for the long terms and help you alleviate cashflow worries.  Get in touch.

Strategic Alliances: the benefits of working together

Your business may compete head-to-head with a number of other companies, but this doesn’t mean you have to treat ALL other businesses as if they are the competition. In fact, there are real benefits in creating strategic alliances with other like-minded organisations.

When you look at the wider marketplace, you’ll see that there are businesses out there that may well compliment your offering. And by working together (rather than against each other) it’s possible to become valued strategic partners. Collaborating to serve your joint customers, improve brand awareness and, ultimately, expand your target market.

If this sounds like a positive strategy, now’s the time to do your homework and start hunting down the best strategic partners for your business.

Working to serve a shared customer base

Strategic alliances are all about finding the common ground between you and your intended partner. This means finding the best ways to combine your efforts.

If you can share the same customer audience, and create a complementary way of meeting their needs, that creates a broader, more connected way of growing both companies.

Finding a company that’s interested in forming a strategic alliance

Find partners in complementary sectors

If you’re an professional services business, like us, it makes sense to partner with solicitors, lawyers, accountants, marketers, and other professional services providers who can help your clients.

If you're a manufacturer, find a shared audience or customer need, and to create some real synergy between your two businesses. For example, if you're a maker of shoes it makes sense to partner with a clothing manufacturer that shares your same sense of style and purpose. 

Take part in business networking and events

To get a wider understanding of your local, or industry specific, business network, it’s worth taking part in plenty of online and offline business events. You’ll meet new people, hear about new brands and will find it easier to find your ideal strategic partner. The wider your business network, the more choices you have for an alliance.

Look at crossover between your target audiences

Once you’ve found a potential strategic partner, it’s important to take a detailed look at the crossover between your partner’s audience and your audience. Do they shop through the same channels? Do they fit a certain age group or social demographic? Are these customers local? Or are they part of a national or global online customer base? How large is their database?

Cross-reference your customer databases

By sharing and comparing your client relationship management (CRM) data, you can cross-reference both sets of customer data. Then see where there’s overlap, or where you may already share some of the same customers. The better you understand each other’s customers, the more likely it is that you’ll find some common ground for shared marketing and promotion.

Run joint events and promotions

Present joint webinars with your strategic partner, or run joint promotions. By finding a common theme, you bring both audiences together and reinforce the alliance between your two brands. You also reduce the expenditure by sharing the costs and reach a wider audience.

Combine your R&D efforts

To move your alliance forward, you can also try combining your research and development (R&D) activity. Find new products, new services and new ways of keeping your joint customers happy. By sharing the time, costs and effort of developing new offerings, both companies will benefit. And you keep your businesses at the cutting edge of their respective sectors or specialisms.

Strategic alliances are all about finding the common ground. If you share the same customer audience and create a complementary way of meeting their needs, you can significantly expand your target market.

The Fundamentals of a Business Budget

A business budget is one of the essential tools in managing your business finances and actively building your business.

A budget shows what you plan to do with your cash over the next year.

For a complete picture of your business health, you need to review the profit and loss statement, the balance sheet, the cash flow forecast and the budget. Taken together, these reports allow you to make informed business decisions and monitor performance.

Why have a budget?

• Forecast sales and expenses according to monthly or quarterly variations.
• Evaluate performance over time, including changes or patterns.
• Get really familiar with where your money goes and where it comes from.
• Clarify targets and goals and use the budget to help you focus and achieve those goals.
• Comparing actual figures to budgeted figures allows you to see potential problems early and plan for unexpected costs.
• A budget will help you to see the big picture and stay motivated over the long term.

Where to start

A basic budget takes known income and expenses, then makes certain assumptions about the timing of income and planned expenditure. The basic budget is based on cash in and out of the business.

Over time, as you start to see the benefits of using a budget, your budget should evolve into a more sophisticated version that includes non-cash elements such as provisions and depreciation.

Most businesses will start with one budget but soon move to having three budgets.

1. Business as usual -  the next year’s budget is based on current year income and expenses, with perhaps a small adjustment for consumer price index increases.
2. Worst case - budget is based on a pessimistic view of next year’s performance.
3.  Best case -  budget is based on an optimistic view of performance over the next year.

A budget is usually for a financial year, but you can also set up budgets for two to five years.

Once you have one budget (or more) set up, you can then run your current financial reports against the budget to see how you are tracking. This allows you to make rational business decisions in real time to adjust accordingly.

Your can run your financial reports monthly and adjust your budget as needed.

Xero's short-term cashflow feature for businesses

Business cashflow is simply money coming in and money going out of the business. Your outgoings will include things like rent, payroll, taxes and supplies. Your income will be revenue from sales but might also include investment funds or the sale of assets.

For most businesses, income and expenditure don’t always happen at the same time so focussing on strong cashflow management will help you prepare for the shortfalls and also manage surplus income.

Cashflow reports allow you to look back at cashflow in your business. This can uncover cashflow patterns over time and show you how much money you need to run your business each month.

Cashflow forecasts look forward by combining payment dates and due dates for invoices, to give you an idea of what your cashflow will be like going forward.

Managing healthy cashflow

Xero’s short-term cash flow feature gives you an up-to-date dashboard view of your organisation's cashflow. You can choose multiple bank accounts and see the projected cashflow over 7-30 days. The more information you include, the more accurate your forecast will be.

Healthy cashflow management gives you better control, so you are more prepared for growth or for the unexpected. Read the article at Xero Central to learn more about this feature.

We can help. Talk to us about improving your business cashflow.

Understanding working capital to maintain business success

If cashflow is the lifeblood of your business, then working capital is the health check you should regularly undertake to keep your business alive. It is important for you to have an understanding of your working capital to maintain business success. Regularly checking working capital will play an essential part in maintaining business success during these times of greater economic insecurity.

What is working capital?

Working capital is your current assets minus your current liabilities and measures the surplus (or deficit) you have to keep your business afloat without needing to sell assets, borrow more, or add your own money into the business. The more working capital you have, the easier it is to fund growth or weather any downturns.

To calculate your working capital: Cash + debtors + stock + work in progress - creditors - taxes owing

For example, if your business had the following balances:

Cash $150,000
Debtors $120,000
Stock $100,000
Creditors $45,000
Taxes owing $25,000

Then your working capital would be $300,000 ($150,000 + $120,000 + $100,000 - $45,000 - $25,000).

If the business had an overdraft of $150,000 rather than a positive cash balance, the working capital would be zero. This means the business would have no cash to cover any slowdown in debtor payments or a downturn in sales (which would lead to higher stock levels). Worse, the business could be in serious trouble for trading while insolvent.

It’s likely your working capital has taken a hit due to Covid-19. Now is the time to review your processes and boost your working capital.

Consider the following strategies:

Build up enough cash to cover at least 2 months’ sales value

One of the key learnings from lockdown was how important it is for businesses to have enough cash in the bank to get them through a shutdown. Use the average sales value for the last six months to calculate the amount you’ll need, then manage your expenses to build your cash stocks up to this level.

Renegotiate your debt

If your business has an overdraft, could the core debt be negotiated into a term loan? Have you spoken to your bank manager about options for managing your debt as a result of Covid? We can work with you and your bank manager to determine your best finance options.

Negotiate with suppliers

Speak to your suppliers and see if you can negotiate better terms. This might be a discount for early payment or longer payment terms. They’ll be suffering too, so work together to come to the best arrangement for you both.

Set aside money for taxes

Calculate the percentage of sales you need to put aside for taxes and put this aside in a separate bank account so you have the cash to cover tax payments as they fall due.

Inject sufficient funds

If the above strategies don’t boost your working capital sufficiently, you’ll need to invest your own funds into your business to cover your working capital requirements.

Even with the many challenges of a post-pandemic economy, undertaking regular working capital checks is an effective way to help increase your business’s cashflow. We can help you calculate your working capital requirements and identify strategies you can implement to increase your working capital.

“Change is not a threat, it’s an opportunity. Survival is not the goal, transformative success is.” - Seth Godin

We can help. Talk to us about your working capital.

Your critical numbers

Establish your critical numbers; to improve the KPIs that have the biggest impact.

The Covid-19 crisis has created a “new normal” for businesses. Traditional ways of working are being challenged and we now need to innovate, adapt, re-engineer, and reinvent the way we work. Lockdown gave us time to consider our options, but two important questions often remain unanswered:

1. How will we know if we are on track or not?
2. Are our new plans actually working?

It goes without saying that our success needs to be measured. But it’s important for us to know what to measure. Your critical numbers are the levers that, if pulled, make the biggest impact to your results. Choose four or five critical numbers to measure. These may vary between businesses, for example, most businesses should know their minimum viable sales number per day or week for survival. Likewise, knowing the gross margin needed to cover your overhead costs and living expenses will be critical for many businesses.

Some tailored critical numbers might be:

Once we’re clear on the critical numbers we should be measuring, we need to establish how to measure them. Having real-time, cloud-based data is the new standard, so having the right software is important. The way you capture data may require additional planning. For example, you may need to make changes to your coding or reporting structure to measure your sales or margin by product type to assess the viability of different product lines. These changes will help to give you peace of mind and certainty that you’re on track. After all, you can’t manage what you don’t measure.

“Measurement is the first step that leads to control and eventually to improvement.” - James Harrington

We can help.  If you need help working out what your critical numbers are or how to measure them, talk to us.

How healthy is your working capital?

We all know that cash is king when it comes to business success, but what exactly is ‘working capital’ and how does this financial metric help measure the health of your business?

Working capital is made up of the cash and assets that are available in the business to fund your operations and keep you trading. It’s worked out by taking your current assets (the things you own) away from your current liabilities (the things you owe to other people).

So, why is working capital such a critical metric?

Having the liquid capital needed to trade

It’s possible for your business to be busy, successful and profitable, but for your cash position to still be in poor health – and that can have a serious impact.

If you can’t readily convert your assets into liquid cash, it’s a struggle to meet your cashflow goals, pay your bills and fund your day-to-day operations. But with the optimum level of working capital, you strengthen your balance sheet and put the company in a solid financial position.

To achieve this healthy level of working capital you will need to:

Proactively manage your cashflow

Cashflow feeds your working capital by pumping liquid cash into the company and keeping the balance between assets and liabilities in a strong position. But to achieve this, it’s vital to achieve a positive cashflow position, where your cash inflows are greater than your cash outflows. This means getting paid on time, lowering your outgoings and keeping a close eye on your ongoing cash position.

Monitor and forecast your financial position

Running regular financial reports helps you stay in control of your finances. With careful monitoring and forecasting of your cash position, you can ensure you don’t end up in a negative cashflow position, without the requisite working capital to trade and fund the next stage in your business plan. Cloud accounting software and business intelligence apps have made it easier than ever to create up-to-date, real-time reports and run dashboards that show your key metrics.

Use additional finance when required

If working capital is looking thin on the ground, then additional funding may be needed to bolster your balance sheet. Short-term finance options (such as overdraft extensions or invoice finance) and longer-term business loans can be needed to keep working capital on an equilibrium.

Working closely with your accountant is vital if you want to promote the ideal level of working capital in the business. We can help manage your cashflow, monitor your financial metrics and provide access to additional finance and funding when your capital needs a boost.

We can help. Talk to us about optimising your working capital.

Dealing with uncertainty – tips for business owners

Whether you’re in full lockdown, restricted trading conditions or back to ‘business as usual’, there’s still real uncertainty for business owners. We’re trading in challenging times at present. And knowing what step to take next is a key worry. We know that you invest more than simply time and money into your business. It is more than a job but part of your identity.

So, how do you get more clarity around your future plans? And how do you work on the short-term future of the business, when sales, income and cash are in short supply?

Focusing your efforts in the right places

Planning the next business move is difficult at the best of times, but it’s doubly problematic when we have so little clear idea of what a post-COVID19 business world will look like.

It's difficult to plan when we don't know what will be possible. What regulations will be in place once you can begin trading? Will the market have changed dramatically? Will you be able to trade over borders and continue to be an international operation? Will you have enough cash to actually operate?

As a business owner, you’ll be continually thinking of new business-critical issues to add to this list – but the reality is that you CAN’T control all these elements. This sense of mounting uncertainty is likely to raise your stress levels and make you more anxious.

So, how do you overcome these worries and find a practical solution?

Try to focus on the things you can control:

• Identify the things that matter to the short and long-term success of the business
• Find the things you can control and over which you have some influence.

It's too overwhelming to try and work on everything at the same time. Instead, try to focus on the one thing you can achieve each day.

Review your overheads and costs

One way to reduce your cashflow worries is to reduce your spending. Look at your controllable overheads and see if there are ways to negotiate better terms with suppliers, cut down on expenses or pause any subscriptions.

Talk to debtors and creditors

If you can bring down your aged debt, that will help your overall financial health. Talk to any late-paying customers and agree when these debts will be paid. And talk to suppliers about extending payment terms, if possible.

Consider alternative revenue streams 

If your current business model doesn’t work well in lockdown, are there other online services that you could diversify into? Any new revenue streams will help to bolster your income and cash position.

Update your website and marketing

Having a great online presence is vital during this crisis, when most goods and services will be purchased online. Give your website a refresh and make it easy for potential customers to find and buy your services.

Catch up with your team

Maintaining contact with your employees is vital if you’re going to nurture team spirit. The more engaged your team is, the easier it will be to embrace change together.

If you’re uncertain about the impact of COVID-19 on your business, please do come and talk to us. We’ll help you get in control of your finances, prioritise the right elements of your business and find a strategy that prepares you for trading in the post-coronavirus market.

Talk to us about other strategies for dealing with uncertainty.