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‘Don’t get sucked into all the hype’: the hidden mistake that businesses will make when managing cash flow in 2021

While 2020 packed a punch that not many people were expecting, impending vaccines and a rebounding economy offer a glimmer of optimism for business in 2021. However improved economic conditions also mean a reduction in government safety nets like JobKeeper and cash flow boost. Properly managing cash flow in 2021 will be a precarious and tricky task for many businesses.

We chat to Dylan Burgess, Partner Relationship Manager APAC at Float, about the hidden cash flow risks in 2021. 

What are some of the biggest issues businesses have with managing cash flow? 

The hardest thing is that businesses aren’t always planning for the necessary expenses coming up. Key things that get missed are superannuation, GST payments and tax withholding. They’re personally liable for these things and they’re not planning for it. It’s once a quarter and it’s not always on their radar.

In COVID-19, this mindset has done a 180 degree pivot because lockdowns are on the back of everyone’s mind. In Melbourne, one accountant had 140 partners close because of lockdowns which has had a massive impact on cash flow. While there isn’t a vaccine, lockdowns are always weighing on the mind of business owners. The mindset of planning for shutdown periods and how long a business can run for if there is a lockdown has kicked in.

Businesses have gone from forgetting statutory expenses to planning cash flow ahead of time.

In lockdown, there’s also been a lot of businesses who’ve had to pivot. But if you’re pivoting, you are asking: can we afford to do it? If we don’t pivot, will we survive?

What distinguishes the companies who successfully pivot from those who don’t?

It comes down to planning. 

Dylan Burgess, Partner Relationship Manager APAC at Float

Those who have done it successfully have foreseen what it will cost them. Acting first and asking questions later isn’t a viable approach in COVID-19. You need to be really calculated and really thinking and pre-planning everything. 

If there’s a curveball and the numbers don’t necessarily stack up, there’s no second chance. We know that loans are available but the banks are hurting now because of loan deferrals and so credit is hard to obtain. Commercial agreements are coming to an end. All of the safety nets are starting to draw to a close. When they’re no longer available, if you didn’t pivot right it’s hard to get out.

The most successful businesses are the ones who did the homework first and planned ahead to see if they have enough cash, know when they’ll start going into the green and ask whether that’s viable. 

What do the low number of bankruptcies in 2020 signal for 2021?

We did an estimate that predicts there will be 3,452 zombie businesses by December this year. Zombie businesses are businesses that otherwise would have declared bankruptcy but are not doing so because of government measures that are in place. 

The lower numbers of bankruptcies is a scary figure. In 2021 there’s going to be an increase in administration. That’s something that we’re worried about and we help businesses with.  We want them to be planning and forecasting and run commercially viable businesses.

What should businesses be doing to prepare?

There’s a couple elements. The first is to be smart with reopening. There’s a lot of excitement and energy as borders start to open. The economy is opening, there’s the trans tasman bubble and we’re seeing a lot of confidence being built up.

But the risk is overconfidence. 

Be careful with stepping on the gas pedal. We want businesses to be successful but we want them to do it in a way that is smart and makes sense. Right now what you thought your reopening would look like and what reopening in a post-COVID-19 world actually looks like is different. 

If you’re in the hospitality or creative industries, you’re going to have less income because you’ll have to comply with social distancing and you’ll have fewer customers at any time. Your income will be lower but you’ll also have higher cleaning costs. So you’ve got to do your homework and understand what is financially viable before jumping on the optimism bandwagon. 

What Government measures should businesses be cautious of and what should they be capitalising on?

The government measures to be wary of are hiring incentives. You don’t want to be hiring someone because you’re getting a good deal from the Government, you want to do it because it makes sense. A lot of businesses think they can get more from the Government, but if you are not growing it is not a good time to hire. 

A lot of businesses are also propped up by cash flow boost and JobKeeper. Redoing your numbers and planning 2021 without cash flow boost is important because JobKeeper is coming to an end. 

There are a couple things that businesses should be capitalising on from the Government. There are grants for investing in technology and training. There are also insolvency initiatives around helping businesses before they end up insolvent. If you are in that borderline and it looks like your business won’t be viable, look into that insolvency reform – see what you can do in terms of restructuring and talk to specialists. 

What software should businesses be using right now?

Businesses should be automating compliance. They should have Hubdoc to automate bill capture and receipt capture. That feeds into Xero or Quickbooks to leverage the power of cloud accounting. 

Once you’ve got those in place, look into some sort of reporting solution and invoice management solution. If you’ve got complex cash flow or are looking to grow, have Float in place to take data from Xero and turn that into actionable forecasting solutions to see what your cash looks like.

What should businesses be doing to prepare for 2021?

Don’t get sucked into all the hype and optimism. Expenses will be higher and income will be lower than expected. If you’re banking of 2021 being normal, it may not be the case. 

Vaccines are coming out but they won’t be in place for Q1. Lockdowns are a real thing that may happen if anything goes awry – so err on the side of caution. Do your planning and do your homework, look at what you expect to come in and what you expect to come out. 

It’s easy to jump on that positivity bandwagon when we’ve gone through such a hard year. But if you do that without first doing your homework, you end up in a yucky creek without a paddle.

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