Rob Lamers explains smart business practices in times of high inflation and rising interest rates.
It’s clear, from the Reserve Bank’s recent blunt statement on the need to rein in inflation, that monetary policy will be tighter in the period ahead, leading to further rate rises and a leaner cash economy.
In this environment, smarter cash management will play an important role in maintaining margins and continued business success.
One of the most obvious effects that a tighter monetary policy has on business is that the cost of loan repayments increases. As a result, profitability is put at risk: whatever gains you make on profit margins can be wiped out by increased repayments.
According to a recent Dun and Bradstreet Business Expectations survey, 39 percent of executives expect interest rates to be the most important influence on their business for the quarter ahead.
In an attempt to stave off some of the effects of rates rises, what we are seeing in the market today are borrowers fixing in their interest rates for three to five years, rather than selecting a variable rate. However, if you already have established business loans you can hedge against the rate rise by negotiating with your financial institution to take out a combination of fixed and variable loans. Generally, fixed loans come with limitations on paying off the principal, while variable loans allow this to occur without penalty. A combination of both can approximate the best of both worlds.
The tightening market will also mean some financial institutions become stricter on their lending criteria and on enforcing loan repayments. Additionally, interest rate rises generally place downward pressure on property prices, so business owners may find they no longer have the available equity in their property to finance their operations, leading to a strain on funding for many businesses.
There are alternative finance options that provide working capital to businesses based on their balance sheets, not real estate. Debtor finance—where a business can turn its outstanding invoices into cash—has become an attractive source of business finance to fill this gap and meet working capital requirements.
As well as shifts in property prices, labour and fuel costs, drought and competition will also have a significant impact on business profitability going forward. Which is why cash flow is so important.
Here are my top tips to help you manage cash flow during tough economic times:
*Analyse your cash flow. Include data not only from your sales pipeline but also from your accounts receivable and accounts payable to understand when money is coming in and going out.
* Save. By understanding your income and spending patterns, you’ll know when your business is most likely to need cash. Plan accordingly. If you can, create an account where you keep a supply of cash for times when income won’t be coming in.
* Minimise your debt repayments. With interest rates looking to rise even further, it is a good time to re-negotiate your loans with the bank—aim for a mix of fixed and variable interest rates to minimise debt repayments.
* Get a back-up source of capital. Debtor finance and overdrafts are two of the best ways to get a temporary supply of cash to meet expenses if your business is otherwise healthy.
* Review your credit policy and debt collection. Manage your debtors to ensure prompt payment, such as shortening payment terms and tightening the collection of overdue balances.
* Credit check potential customers. Aim to only trade with companies that you know are not only creditworthy, but also have a good track record of paying their bills.
* Manage your supplier. Shop around for the best deal and negotiate longer credit terms with suppliers, so you can complete the work, bill your customers and receive payments prior to paying your suppliers.
* Monitor your growth. Growth costs money. By staying within the limits of your cash flow, you’ll be able to fund growth yourself. Using contracted workers in busy times often helps to manage growth.
* Limit the stock you hold. Holding stock means that your cash is tied up, so plan ahead and don't hold too much stock.
* Keep people in the picture. Remember to communicate with all the key people involved in your business including your bank manager, suppliers and customers. Tackle issues early so they don't develop into problems later.
Rob Lamers is CEO of Oxford Funding (a division of Bendigo Bank).