Magazine article New Zealand Management

Cash Is King: How to Boost the Bottom Line: The Finance Function Is Transforming Itself from an Administrative Overhead to a Value-Generation Centre, from a Repository of Historical Data to a Source of Future-Focused Intelligence Reports. as the Economy Shifts Gear, Vikki Bland Outlines Current Finance, Factoring and Cash-Flow Options

Magazine article New Zealand Management

Cash Is King: How to Boost the Bottom Line: The Finance Function Is Transforming Itself from an Administrative Overhead to a Value-Generation Centre, from a Repository of Historical Data to a Source of Future-Focused Intelligence Reports. as the Economy Shifts Gear, Vikki Bland Outlines Current Finance, Factoring and Cash-Flow Options

Article excerpt

Two years after start-up, a now successful New Zealand export business hit a rather significant wall: after a period of rapid growth, an unforeseen provisional tax bill left the business with insufficient cash flow to pay staff. To make matters worse, the business had not proven itself to the extent that its bank was willing to bridge the gap. At that point, says one of business owners, all the shareholders lost it.

"We were all blaming each other and everyone was terrified of the effect on staff and the possibility of going under. We even shouted at our bank manager," says the owner.

The business--which does not want to be named--was eventually saved by a family loan but the lesson was learned. Today, it is thriving thanks to careful cash-flow processes, smart use of software tools, regular and close consultation with both the IRD and accountants, and good debtor management practices. It has also forgiven, but not forgotten, the wariness of its bank.

For a variety of reasons, positive and negative, most businesses in New Zealand need ongoing and affordable credit facilities and, occasionally, cash injections. The challenge is to know what to borrow, when, from whom and through what finance scheme.

For larger organisations, an additional challenge exists around attracting finance professionals who know how to align business and finance strategies, avoid financial crises, and to plan and forecast future income and expenses against macro factors like a possible economic downturn.

Not surprisingly, your average experienced chief financial officer is in demand, attracts a large salary and may sit on the board. Seeking senior financial professionals through an executive recruitment agency specialising in finance staff is therefore wise.

Avoid the crisis

Before we look at proactive financial planning and financing for businesses, it's important to look hard at reactive strategies and cash-flow management. Is it common for businesses to hit a cash-flow crisis; what causes it? How can it be resolved so a business can move from a reactive financial position to a proactive one that offers choices?

Hamish Edwards, CEO of Wellington-based accounting firm Edwards Accounting, says cash-flow problems are disturbingly common amongst small and medium sized businesses in New Zealand--he doesn't know many businesses that haven't faced one.

"Small businesses tend to grow fast and that growth soaks up working capital," says Edwards.

He says the actual causes of cash-flow crises depend on a number of factors including what the cash-flow cycle is (the day a business has to pay its creditors compared with the day it makes a profit), what customer orders have been placed, how many debtors exist, how fast the company is growing--and taxation.

"Too many businesses just don't plan for their taxes and some don't even know what taxes they have coming up," says Edwards.

Yet, as any good accountant will testify, establishing a cash-flow model can be as affordable as accounting consultancy fees and a Microsoft Excel licence.

"Cash-flow management doesn't have to be super-detailed, expensive or difficult, and yet it is essential. Businesses need to know their upcoming obligations, they need a daily cash-flow model to help them forecast and plan, improve stock turnover, attract investors, save for tax," Edwards notes.

He says businesses will do well to start with a pessimistic cash flow.

"Halve your sales and see what it does. Make a budget and stick to it. Don't have an open budget to spend on anything and everything. Create a culture of cost awareness so you are always aware of what you are spending your money on."

Getting help

Banks are not the bad guys refusing to help businesses out of a cash-flow hole, according to Greg Byrne, Auckland regional manager business banking for Westpac.

Byrne says when evaluating business funding, Westpac looks for a business plan or strategy with substance, and at the existing cash cycles of the business, its suppliers, customers, longevity, and future industry prospects. …

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