Partner’s Opinion – Chris Smith
Following the centre right coalition victory at last year’s election, we were made well aware of the fact New Zealand was to face a slow and, for some, tough financial climate for the foreseeable future. Going into winter, our office is seeing evidence of a slowdown in the economy. Retail spending has slowed down, and while pricing on contracts is ongoing, there has been a delay in awarding them.
The desire to take on low-cost debt over the last several years is now biting. Our central bank has not been afraid to use that known level of debt in the market as a tool to slow the desire to spend and whilst there is talk of the Reserve Bank needing to cool their approach and reduce the OCR, that may still be some months away. Even then, the effects of any reduction, such as an increase in spending, will take time to be seen in markets.
With lower profits comes the need to manage the balance sheet carefully. Old-fashioned measures to check financial health, such as the working capital ratio, are useful in ascertaining the short-term health of your business. Your current assets should at least cover your current liabilities. There should be a cash buffer to cover necessary overheads and wages in low profit months. Spending directly off the Balance Sheet on plant and vehicles should be considered carefully, along with owners drawings and dividend policy. If the business model is generating less cash via lower profits, any cash on hand should be kept to support trading in such an environment.
Many of our clients report financial performance and position monthly and consider the financial health of trading in a timely fashion. Habits or decisions can be amended quickly and financial harm averted. Businesses can pivot to deal with an uncertain environment via the availability of financial information monthly.
If you are feeling cash is tight and you’re uncertain that you can define exactly why, please contact us. The financial information we can provide will enable you to adopt a strategy to govern your business through these times.
