Surviving a cash flow crisis

Since its inception, nearly 900,000 businesses have applied for JobKeeper – highlighting the importance of getting through a cash flow crisis for business owners and employees alike.

If you do the maths, it turns out that around 40% of all Australian businesses (probably more – they just haven’t applied for JobKeeper) have been plunged into one of the most brutal cash flow crisis of all time.

Interestingly enough the primary recipients of the JobKeeper program have been sole traders and companies (both around 40%), with only 15% of trusts and 6% of partnerships applying for the subsidy. And as businesses with a turnover of greater than $1billion had to have sustained a drop in GST turnover of more than 50% to apply for JobKeeper, not 30% for those with turnover under $1B, for the purpose of today’s blog, we’ll assume aside from airlines and hotel groups, the majority of the entities experiencing cash flow in crisis are SMEs.

The Government categorically understands how important maintaining cash flow within the economy is to the health of all Australian business (and government), especially in times of crisis. Hence its introduction of its unprecedented six-month Covid-related moratorium on insolvencies and payroll tax, its Cash Flow Boost for those with employees, and JobKeeper programs.

And yet, in spite of all of that, many businesses are doing it extremely tough at the moment – especially those whose ability to trade was snuffed out by Federal Government mandate back in March.

As a result, we’re all probably a little more savvy about cash and a little more familiar with a cash flow crisis than before. So we thought we’d explore how that new found knowledge might change how you do business moving forward.

What lessons about how to survive a cash flow crisis can we take away from all of this?

Let’s start with what’s cash flow?

In essence it’s the net amount of cash going in and out of your business within a given period (let’s say a month). In order to survive a cash flow crisis, a business must have adequate cash to support continuing on in business. If a business runs out of cash and isn’t able to obtain new finance, it will become insolvent.

Common mistakes around cash flow

If you’ve got more coming in from sales than you do going out from the cost of goods, it would be easy to assume that you’re in the black.  And that’s a mistake a lot of business owners make. Then there are the many small business owners who assess their business’ financial position by focusing just on their bank balance. As long as it’s got a credit balance, they think they’re doing okay. But these two common mistakes can not only lull you into a false sense of security, it can also cause significant amounts of grief when bills like PAYG (or company) tax, super and/or GST or loans fall due. Neither of these methods to keep track of your cash flow bode well, and even less so in a crisis.

Liquidity is important

In a cash flow crisis, the ability to pay your business’ bills and remain a going concern is critical. Being able to access to liquid funds can be a godsend. Liquid funds can include retained profits (cash at bank), funds invested in shares or other easily liquidate-able assets or funds from finance. A lot of business owners are loathed to seek finance, especially when it’s not needed. But as with many things, the time to think about it, is when you don’t especially need it. Sure trying to bootstrap your way through a cash flow crisis is commendable and taking on debt can set your plans back a bit, but sometimes that’s the best and possibly only way through a cash flow crisis without heading into insolvency.

Forecasting your cash flows is critical – especially as we approach recovery

A good cash flow forecast looks at how much money you expect to receive in and pay out of your business each month – ie: every movement of cash. It’s one thing to be receiving (and relying on) Government subsidies until September, it’s another thing to know exactly what you’ll be facing when those subsidies stop or phase out. Using a tool such as Xero in cash basis accounting (as opposed to accrual method) will give you a good idea of when those bigger bills have hit in the past and when you’ve regularly had your ‘good’ cash months. If you’re across that information, it enables you to know what you’re aiming for. That, in turn, is critical for formulating a plan on how to get back there. You might not hit the mark immediately, but at least you’ll know where you’re heading when we return to the new normal.

And that’s where we can help. If you’re looking for someone to help you forecast your business’ cash flows, budgets, or just provide an arm’s length point of view, we’d love to chat. You can reach us on 02 6023 1700 or by using the form below.