Managing cash flow in a small business is a challenge at the best of times. But 2020 has exposed many small businesses to the heavy costs of not having operating cash flow systems in place.
In March, the federal government announced six months of financial support for businesses to help them survive the economic downturn with COVID-19.
JobKeeper, which paid a flat fee of $1,500 per employee per fortnight to affected businesses, has been a crucial lifeline in keeping Australian ventures afloat. Recent announcements have extended JobKeeper at a reduced rate of $1,200 from October to December 2020, and again to $1000 per fortnight from January to April 2021.
As businesses start to recover, some may no longer be eligible for the reduced rate of JobKeeper. Time to make a plan.
Note: JobKeeper has been changing regularly, so check the treasury website for the most up-to-date guidelines and timelines.
So, how can you prepare as you transition from JobKeeper?
The first step in knowing if your business can survive without JobKeeper is to have a firm grip on your numbers.
Having a good cash flow means your customers will pay you before you need to pay your suppliers. Having it reversed will mean you’re in a cash flow deficit and will be dipping into your reserves to pay expenses and suppliers, which can lead to a vicious cycle of always being behind in payments.
This happened to many businesses when JobKeeper started and they had to pay out thousands in JobKeeper payments while waiting to be reimbursed by the government. Once industries began to close down and restrictions were enforced, many businesses weren’t able to make up the shortfall when sales then slumped.
Businesses can expect a double hit to their cash flow when JobKeeper payments finish at the same time as hardship amnesties on payments for rent, loans, council rates and utilities end.
Getting a grip on your cash flow
If you don’t already have a good understanding of your numbers — now is the time to prepare for whatever might happen when the JobKeeper payments lessen and then stop.
- Take the time to map out all your upcoming expenses. A spreadsheet<https://www.business.gov.au/finance/accounting/how-to-set-up-a-cash flow-statement> is a great tool, as you can play with the numbers and see how different changes will impact your cash flow.
- Prepare for any expected cash coming in. Although it’s hard to predict what might happen a few months from now, this is a chance to get real about what you’ll do if things don’t improve. Consider other sources such as GST rebates, tax refunds, equity or loans and government grants.
- Compare your income and expenses month by month to see if there are any trends or big expenses that you need to start planning for, and how the reduction of JobKeeper will impact on your bottom line.
- Be ready to borrow if you need to. Having the paperwork ready to go and knowing how much you could borrow if you need to will save a lot of headaches if situations change rapidly.
At the same time, look at where your current loan securities are being held. If you’ve used your family home as security for a loan against the business, now might be a good time to switch to using your business assets as security instead.
I keep hearing about help for small businesses — what’s out there?
In the midst of the hardships and economic downturn, the volume of support and initiatives for small businesses to encourage them to go into hibernation rather than shut down has been reassuring.
The federal government has led the way with supporting banks to open up lending for businesses with the Coronavirus SME Guarantee Scheme.
This government is guaranteeing 50% of the loans to SMEs from eligible lenders, and up to 100% of loans to creative enterprises that have been hardest hit by the restrictions.
The loan size is increasing from October to a maximum of $1 million, so if your business model is solid and you have the track record to back it up, it could be a great time to upgrade equipment or invest in an expansion plan.
The federal government is also increasing the instant asset write-off for eligible businesses from $30,000 to $150,000, so your investment could have instant tax advantages.
Don’t forget to check state and local sources
State and local governments are also providing targeted support to businesses, especially those in areas hit hardest by strict lockdowns, such as:
- Sporting venues
As well as grants to cover business expenses, many local councils and business associations are offering training, support and grants to help businesses with their finances, analysing cash flow, marketing, moving to digital marketing and navigating the multitude of OH & S requirements and obligations.
Check out the relevant bodies in your area to see if you meet the criteria, such as this one from Business Victoria.
Maximise your profits by reducing expenses
Once you’ve done the maths on your cash flow, it’s time to look deeper at what is making you money and what’s costing you money.
Some quick ways to cut your costs:
- Shop around for a better deal on expenses like loan rates, insurance, utilities and internet service. Many companies would rather offer loyal customers a deal so they don’t lose them.
- Eliminate (or hibernate) low-profit/high-cost products or services and invest more in products and services that give you the best returns.
- If staff are unable to do their normal jobs right now, look at how they can upskill, retrain, streamline processes or build new products or services that can help to grow your business.
- Evaluate your staffing needs. Do you have enough staff to meet demand? Are all staff working in roles that make the best use of their skills? Are there any opportunities to take on junior staff in an apprenticeship or traineeship role that could benefit your business through wage subsidies?
- Are there any areas leaking money that could be improved with an investment — such as putting in solar panels and insulation to reduce electricity costs or upgrading equipment that is starting to age and incur high maintenance costs.
- Look at moving to digital processes where possible, to reduce manual administrative costs. New software such as eFaxing can save hundreds of hours a year on hardware and tech support, as well as the manual processing of each piece of paper that comes in.
Above all, be sure to keep good records and receipts so you can claim as much as possible on your tax returns.
Tuck away some cash for a rainy day
If you haven’t already prepared a savings plan, there’s no time like the present. If your current cash flow situation is so tight that you can’t save much, start small.
Even $100 a week put aside for the next 10 weeks would give you a $1,000 buffer if you need it when JobKeeper finishes.
When evaluating your finances, the JobKeeper boost to wages might make you feel like you have a little more cash in your pocket to play with. If possible, put the difference in wages aside each fortnight to see you through the drop in support as the subsidies reduce.
Will your business survive post-JobKeeper?
It’s a tough question, but it needs to be put out there. Businesses that only have enough cash flow to last the next week or month at a time are going to be particularly vulnerable.
In this unpredictable climate, further lockdowns, shipping delays of key products or unexpected events could have devastating consequences for businesses already on the edge when the JobKeeper support reduces and eventually cuts off.
Plan now for a smoother transition
Getting a handle on your cash flow situation, reducing unnecessary expenses and taking advantage of the support and advice on offer can help your business successfully make it through to the other side of COVID-19.
If you’re struggling to make sense of the numbers, your local business council, state government and the Australia Taxation Office all offer free and low-cost advice and support to make sure your business survives and thrives in the next 12 months.
This post should not be taken as legal or financial advice. Always consult legal, financial and other relevant professionals before undertaking a merger or acquisition.