Cashflow vital for avoiding insolvency

Now that government support provided to business during New Zealand’s Covid-19 lockdowns has ended, we are entering an uncertain economic climate with high inflation and low business confidence and some businesses are feeling the pinch as cashflow becomes constrained.

Nexia New Zealand corporate advisory partner Craig Melhuish says with increasing pressure on businesses he has noticed a slight increase in the number of SMEs seeking advice about insolvency.

“When Covid hit we predicted a large upswing in the number of insolvencies, but the government stepped in with their business rescue package which meant that most businesses were in a good space when we came out of lockdown.

“Of course, this also meant that some businesses were rescued that shouldn’t have survived and what we are seeing now is that many New Zealanders are reducing their spending to cope with the increased cost of living and rising mortgage rates.

“This makes for a difficult time ahead as consumers cut back on the non-essentials and businesses are still struggling to find staff with high employment rates and continued difficulties in hiring off-shore staff.”

Craig has five tips for businesses to ensure they continue to thrive under trying economic conditions.

1. Cash is king

Businesses need strong cash flow and access to cash. Those who are struggling need to carefully assess their business model to find out what is blocking their cash flow.

2. Examine lines of credit

Look at the line of credit extended to clients. Do not let this get out of control and think carefully about whether it would be better to get this credit turned into regular invoices to provide the business with a smoother cashflow.

3. Vet new clients carefully

Make sure you do background research on any new client before you agree to work together. You need to be sure that they are in a stable financial position. This is even more important if they have recently made a sudden switch as they may owe outstanding amounts to creditors.

4. Avoid ageing debtors

Watch out for ageing debtors and chase up on any overdue invoices immediately after they fall due. The old saying “the squeaky wheel always gets paid first” applies here so make sure you follow up to avoid payment delays.

5. Invoice regularly

Your cashflow comes from invoicing so ensure that you do this regularly and put a reminder in your schedule, so you don’t forget to do this. There is no fixed rule around invoicing on the 20^th of the month so consider different invoicing terms for various clients, especially if you don’t know them well.

If businesses are noticing small issues, Craig says it is better to seek professional help as early as possible so that a full analysis of the business can be conducted by an expert and solutions can be put in place to solve issues before they snowball out of control.

“What we find is that if these problems are identified early then often businesses do not go down the path of insolvency. It is better to put your hand up and ask for help than soldiering on and putting on a brave face.

“Having an honest conversation and digging into costs versus profitability or looking at which product runs are no longer working can be a good place to start.”

If businesses are facing difficulties, Craig recommends contacting the team at Nexia New Zealand for assistance as soon as small problems are noticed.

“Bringing in someone with a fresh perspective and putting everything out in the open for review can lead to a positive turnaround for a business.”

If this has raised some red flags for you, please speak to your Nexia advisor today!