Protect the ‘King’: Saving Cash Flow In Your Business
With COVID-19 blindsiding the world, the full impact of this epidemic on businesses and supply chains is still unknown. So, how do you manage cash flow during a crisis period?
If cash flow is ‘king,’ real estate principals and business owners must endeavour to protect it at all costs. That’s easier said than done however, with CoreLogic reporting that 60% of Australian real estate agents reporting that buyer and seller enquiries have fallen by more than 50% over recent weeks. While consumer confidence has strengthened for the fourth week running, though the gain of 1% to 85.0, it’s much smaller than over the prior three weeks, so it’s understandable why some real estate business owners are still concerned. While new restrictions issued by the state and federal governments have added an extra set of challenges to the mix, prohibiting agents from conducting in-room auctions or open homes, it’s not all doom and gloom as real estate agencies employ innovative ways to remain operating ‘business as usual’ and maintain that all-too-important cash flow.
Eddie Chung, Partner at BDO says it’s important for principals to have cash flow on the forefront of their mind, as businesses that lack such reserves could find themselves in an “existential crisis.”
“Now that the headwinds have presented themselves front and centre, stockpiling cash should be the priority to maximise a business’ chance of survival,” explains Chung. “Regardless of what your profit and loss says, even if you have the profit but you don’t have enough cash flow to pay your creditors, you’re technically trading insolvently. Putting aside the ‘safe harbour’ rules and the recent changes in the law regarding statutory demands, not being able to pay creditors would potentially provide the opportunity for the creditor to wind the business up, and directors may become personally exposed to the company’s debts.”
Even in a difficult economy, there are ways to protect your business’ cash flow – one of those being to assess the creditworthiness of customers before providing a service to them. “Many people and businesses may experience cash flow tightness and would therefore be forced to become slow in paying you,” continues Chung. “It’s likely that you would have to spend a lot more time chasing debtors and negotiating new payment terms with them if they’re negatively affected.”
The Federal Government announced a $17.6 billion economic plan last month, with $6.7 billion of that dedicated to boosting cash flow for eligible small-to-medium businesses. During the announcement, Prime Minister Scott Morrison said the plan would “back Australian households with a stimulus payment to boost growth, bolster domestic confidence and consumption, reduce cash flow pressures for businesses and support new investments to lift productivity.” Through the Australian Taxation Office (ATO), tax-free cash flow boosts between $20,000 and $100,000 are now available to eligible businesses, delivered through credits in the activity statement system when eligible businesses lodge their activity statements. Initial cash flow boosts will be delivered as credits in the activity statement system from the 28 April 2020. Real estate businesses can determine their eligibility by visiting the business.gov.au website.
While these payments are designed to bolster businesses’ cash flow so they can keep operating and pay their bills such as rent or electricity, real estate agencies are encouraged to look into what other entitlements they’re eligible to receive, such as the JobKeeper payment, in order to retain their staff. The REIQ has produced a guide for real estate businesses wanting to know more about these entitlements, which you can find here. Alternatively, visit the Queensland Government’s coronavirus pay-roll tax relief webpage here.
Determining the appropriate amount of cash flow needed to keep a business afloat is something that needs to be worked out on a case-by-case basis. An analysis of your cash flow over the past 12-24 months can help you identify your previous peak and slow seasons, which in turn gives you a good feel of what your level of cash reserves should be during tough times. Understanding slow periods and identifying a budget can allow you to store a little extra cash away now, to help navigate any future uncertain times.
As always, speaking to a certified and trusted accountant will assist you to develop a cash flow plan that’s right for you and your business.
Important disclaimer: This article is provided for general information only, and the author is not engaged to render professional financial advice or services through this article. Readers should satisfy themselves as to the correctness, relevance, and applicability of any of the above content, and should not act on any of it in respect of any specific purchase, investment, or other financial activity without first obtaining their own independent professional financial advice.