How deep in the red will you need to swim this year?

Ah, summer. The sap is rising. So are the bills. With the fallow holiday period just behind and the spectre of the taxman (provisional tax, GST, PAYE, quarterly FBT and all the rest) looming right ahead, this is, for many businesswomen, the season of the great cash conundrum: paying Petra but still waiting to be paid by Paula.

Anyone already successfully established in business knows what this means – but here’s a recap for those about to start a new venture.

Simply put, the cash conundrum is what happens when creditors are knocking down your door demanding payment while you are still waiting for your debtors to pay you or, worse, you haven’t even invoiced for the goods or services that you produced in the first place by using the creditor’s supplies.

Why should this be? Your income statement is showing a bumper year to date, your balance sheet is strengthened by the large amounts of debtors but all this is not helping the fact that your pesky creditor wants their payment now.

It’s at about this point that many a successful business operator, financially harried beyond belief, breaks their New Year’s resolution to give up the fags forever and buys a new pack, or two. Anticipating this scenario (and caring as I do about my clients’ health) is why one of the first things on which I advise is how to master the cash flow budget.

Contrary to many people’s view, good cash budgets aren’t about restricting spending. Restrictions, after all, don’t always correlate with prosperity. Rather, good budgeting is about forecasting your cash needs. What are they? How deep in the red will you need to swim this year? How much of an overdraft facility do you need to arrange to get you through the periods of cash depressions like these? And what about the next financial year – how’s that looking?

Among the clients with whom I’ve chatted recently, about this last point in particular, has been Heathrose Research. It is a Wellington-based company run by women who wanted to forecast the next year’s cash flows so they would know when they would anticipate their growing business needing extra cash and how much. This they did in advance of needing the cash. Because of this, their bank was happy to come to the party and there were no post-Christmas surprises for anyone in early 2010.

We were also able to monitor against that cash flow forecast so Heathrose Research’s operators knew if they were ahead or behind where they had anticipated being, so they could react promptly if required.

My second piece of advice for anyone tackling the cash conundrum: don’t overdraw funds from your business.

Too often, people receive large sums of cash in their insolvent company and get so excited that they withdraw for personal use. In doing this, they disregard the fact that their old payables are crying for attention and their business is gaining more negative creditor terms and alas, a poor reputation.

So, set yourself a standard drawings amount based on your cash flow budget. Review it regularly.

Another good idea is to review the way you invoice your goods or services. Try to get your payment period as minimal as possible. Look at your competitor’s payment policies. You may find that it has become industry standard for payments to be made within seven days, while you are still allowing your clients 20 days.
Something else – how long are you carrying work in progress? Work in progress sucks cash reserves dry. If you have a product or service that takes, let’s say, two or three months to complete, then invoice as you go every month – you’re not a finance company.

Also, remember the old trick of discounting for prompt payment – just like the power companies – a nod to the fact that quick payers decrease your need for debt facilities.

Acting now with the right professional assistance for the months ahead will ensure a happier business year. And it may just help you keep some of those other New Year’s resolutions as well.

Debbie Haddon
www.openside.co.nz