March 25, 2020

Managing Cash Flow following a Disaster – A Regional Focus

In November 2019 I authored an article entitled ‘Surviving the Christmas Cash Flow Hangover – A Retail Focus’

It was discussed that the December Business Activity Statement is often the largest one for the year due to the higher sales that Christmas generates, which results in a large GST bill and a suitably high pay-as-you-go instalment for the same reason, given additional staffing required at this time.

So, if you wish to survive the Christmas cash flow hangover, you need to:

  • Have a plan.
  • Prepare a cash flow statement.
  • Know you will break even.

The impact of the natural disaster in these regions has resulted in a large number of businesses being denied their profitable trading period for the 2020 financial year. What is meant by this is that certain businesses in the affected regions rely upon the Christmas trading period to generate the majority, if not all, of their profit and to carry them through for the rest of the year.

With visitors to these regions being told to stay away and with local residents being evacuated, trade has been adversely impacted resulting in significantly lower turnover, which for many businesses has been below the level required to breakeven and cover costs.

So, it is now more important than ever that businesses:

  • Know their breakeven position,
  • Prepare a cash flow forecast, and
  • Have a plan

What is your breakeven point?

Your breakeven point is the level of sales that equals variable costs (for example, trading stock) plus your fixed overheads.  This is the most important number in your business and should be the key figure you use to determine the viability of your business.

By knowing breakeven point, you can easily determine what level of sales you need on a monthly or weekly basis to ensure you are not trading at a loss.

Will you have enough Cash?

A critical element of any plan involving your business is a cash flow forecast.  A cash flow forecast estimates the amount and timing of cash coming into and leaving your bank account.  Knowing the time of expected cash inflows and outflows will help you make the important decisions around stock turn and staff levels.

It will also assist to ensure that you are able to pay your debts as and when they fall due and that, as a Director, you do not run the risk of trading whilst insolvent.

What’s your plan?

Knowing that your business is entering what is traditionally a loss making period, and having not traded at a profit or the profit expected to be achieved from the Christmas trading period, immediate consideration needs to be given to working capital requirements of the business to enable trade to continue.

The preparation of a cash flow forecast will assist in determining the cash shortfall that will arise during the forthcoming months until the profitable trading period returns.

Once the working capital requirements are determined, business owners need to consider how they will finance said working capital requirements. SME’s are traditionally funded through mortgage finance. However, what if the business owner has limited capacity to borrow additional funds to cover their working capital requirements?

There are a vast number of alternative lenders in the market that provide a variety of loan products to SME’s. However, alternative lenders are generally more expensive than traditional mortgage finance, so proceeding with such finance needs to be factored into the business’ cash flow forecast to ensure that the business will generate sufficient cash flow to repay the funds borrowed and continue to operate at a profit.


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