Cashflow planning, by Stewart Russell
The basic principle is that you need to make enough income to cover your costs and expenses. If you cannot generate additional income, you need to look at ways you can reduce costs. Businesses need to review their new cost structures to ensure that their pricing covers at least the cost of providing the product or services.
One of the continuing impacts of COVID has been the delays in supply chain. Most businesses are seeing increases in the raw material and products they require, part of this being driven by the increase in freight costs, which of course isn’t helped by the fuel price.
Low levels of unemployment create another challenge for businesses who are looking for staff. There are several ways to help keep and attract good people. Consider things such as flexible working arrangements, health insurance, and other benefits to give your business the edge.
Additionally, businesses are under pressure to increase wages to help members of their team cope with the increases in the cost of living.
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 as- 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.
By doing our best to pay our staff, suppliers and landlords, provides them with the cash to do the same, and so what goes around, comes around, especially in our local community.