PKF Francis Aickin Limited, Far North, New Zealand
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07 May 2020
A lot has happened in the last seven weeks and our lives and our businesses face major changes. However, there is one consistent factor in these challenging times – Cash is King.
Most of us have had a significant drop in revenue and juggling to pay the bills is now a major challenge.
It’s become even more important to understand exactly what your business cash breakeven point is. How much cash does the business need to generate to be able to pay the bills?
In these uncertain times predicting income is going to be difficult and may require some crystal ball gazing; but at least if you know how much money is needed to pay the bills, you have a target to aim for.
For a business with predominantly fixed costs the calculation is very simple. Add the total costs for the month and divide it by the number of working days e.g. if your average monthly costs are, say, $11,000 and there are 22 working days in the month, then you need to generate $500 income per day.
Remember, you are dealing with all cash transactions, so you need to include loan repayments to the bank and IRD payments. You should also include the cash you need to withdraw from the business to pay personal costs, such as mortgage and grocery bills.
For retailers or wholesalers, it is slightly trickier - they must include the purchase cost of goods. However, the principle is the same. Using the above example if you have a gross profit margin of 20%, you will need to sell $2500 of product per day to make a gross profit of $500 to cover your costs.
A simple spreadsheet which calculates your breakeven position is available on our website www.pkffa.co.nz under Publications - use the search box.
To get a bank loan you will probably need to prepare a cashflow forecast. If you need further help, the Government has just given an extra $25m to Regional Business Partners (RBP) to provide eligible small businesses with additional support. PKF Francis Aickin is registered as a service provider with RBP.
The Government has also introduced other initiatives aimed at helping businesses survive these unprecedented times. These include the wage subsidy, government backed loans through the banks, and some tax relief by being able to carry back losses to prior years.
Grant Robertson announced last Friday a new Government loan scheme, advanced through the IRD, which is available to viable small businesses. Those businesses (less than 50 FTE employees) can borrow up to $10,000 plus $1800 per FTE employee, including working owners.
The loan is interest free if repaid within 12 months and only 3% per annum if paid back over five years. No repayments are due for the first two years. Note; eligibility criteria are the same as for the wage subsidy.
The purpose of this is to provide cashflow for businesses to help them cover costs and pay suppliers.
Times are tough but if we all stick together and do our best to pay our staff, suppliers and landlords, then this will provide them with the cash to do the same.
Good luck, stay safe - and we are here to help.
For more information on how we can help your business, get in touch