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February 15, 2016 BUSINESSLINK 9 Cash flow problems hit new ventures Luke Parker The ability to generate cash flow in the infant stages of a new start-up can be a deciding factor as to whether a business survives or fails. With roughly a quarter of Kiwi businesses failing within the first three years, it is important to have a good foundation and take the right decisions around money. Simeon Burnett, Chief Executive and Co-Founder of ‘Snowball Effect,’ an Equity Crowdfunding Platform, said that one of the classic mistakes start-ups make is not having a clear plan around cash flows. Planning vital “A good idea would be to map out the next 18-24 months of cash flow on a monthly basis, run multiple scenarios to get a sense of how much cash you’ll need to get through, then plan out how you will fund it. “Your forecasts will always be wrong, and hence it is important to test them. You should understand what a ‘worst case’ may look like and plan accordingly,” he said. Messy debts Mr Burnett said that the reality for most start-ups is that they sail into the unknown, things cost more and generally take longer than they may think. “If you do not have a financial background, see if you can find an experienced mentor who can review your forecasts and plans, and challenge you on how realistic they are,” he said. According to him, depending on the number of founders that the business has, things Things that can cause cash flow issues • Things that can cause cash flow issues. • Not invoicing sales or collecting debtors in a timely fashion. • Paying suppliers upfront • Buying excessive amounts of stock This is potentially a double whammy as it can also impact overheads such as storage costs. Only order enough stock to satisfy estimated sales in your lead time plus a week or two. • Under-performing overheads such as staff. This includes a sales team who are not hitting KPIs or marketing that is not generating enough leads. • In the early stages, keep personal drawings to a minimum and use the profits to grow the business. Money, money everywhere but not a penny in the till Luke Parker like loans and credit cards when cash flow is tight can get messy and cause issues down the track. “If your start-up has legs, chances are that you must bring in a good tranche Simeon Burnett of capital to get things moving. Get your company to the point where you have validated your product and service in the lowest-cost manner possible, then draw up a capital plan to see you through the next 12-18 months,” Mr Burnett said. More advice from Simeon Burnett on improving cash flow • More advice from Simeon Burnett on improving cash flow • Understand the major costs levers of your business. • Is it labour costs which are relatively fixed, or customer acquisition costs and marketing which can be more variable? • If you do not have a strong financial background, seek support and guidance from those who do. • You will need financial nous in your business. Therefore, deal with this. • Make sure that you know your numbers and take time to review historical performance as well as how realistic your forecasts are. At times forecasts should be revised. • Set up an accounting software early and be rigorous in getting familiar with how it works. Make it central to your business activities. • If a cash flow problem arises, attend to it immediately rather than hoping that it would go away. Luke Parker is Online Content Specialist at Westpac. The above article was posted under Red News on the Bank’s website (www.westpac.co.nz) on December 15, 2015.
February 15, 2016 BUSINESSLINK 11 Chinese economy begins to worry the world Cameron Bagrie The vibe from my recent trip to Asia has not inspired confidence regarding the region’s near-term growth prospects,but we still believe in the positive medium-term story. Risks and challenges are clear. Although the domestic economy is still chugging along well, it reinforces that the risk profile for the Official Cash Rate (OCR) is still skewed lower. We continue to closely watch the five factors we listed last year (China, funding markets, domestic inflation, credit growth and the New Zealand Dollar) to determine whether a change in our view of a stable OCR is warranted. However, for now, across real economic barometers we expect the positive vibe apparent in late 2015 to extend into 2016;the economy is looking okay. Interest Rate Strategy Concerns over the outlook for China and lower oil prices are expected to keep markets on edge. Low domestic inflation and a benign short-term inflation outlook are expected to support receiving-side interest, with market pricing for OCR cuts to intensify, despite the NZD’s adjustment to date. Risks for NZD/USD remain firmly skewed to the downside with China and commodity prices clearly warning of further weakness. However, in the short term, sentiment is already weak and technical indicators are oversold. We prefer to sell rallies rather than position for further immediate declines. NZD/AUD strength demonstrates that markets expect the New Zealand economy to hold up better than the Australian economy, a theme we concur with and expect to be borne out in the data. Views on China’s ‘actual’ growth story – and prospects for wider Asia more broadly – were much more subdued relative to prior trips. There were some genuine worries over whether Chinese authorities have actually lost control of some key market variables. Views seemed to oscillate from day to day on this, in part because market participants were dealing with regulatory changes on a daily basis, hinting of heavily reactive policies. One policy response often created leakage elsewhere, somewhat akin to the game whack-a-mole;you whack one mole with your hammer and another pops up! The consensus was that China’s RMB was going down, either in a managed fashion or potentially in a one-off hit. A weaker currency exports one’s problems. It also means a NZD on aTWI basis that will struggle to push materially lower despite recent movements in the NZD/ USD. We heard many stories about capital flight from China; in some instances, a capital loss was being accepted simply because it was the lesser of two evils versus waiting for currency depreciation. Any views were low-conviction ones, if they existed at all. We were constantly asked for our thoughts on the state of play; we had a view, but found the question ironic given we observe the region from afar (though sometimes that can be an advantage). Cameron Bagrie is Chief Economist at ANZ Bank. The above is a shortened version of his original analysis which can be accessed at www.anz.co.nz GIVE YOURSELF PEACE OF MIND WITH AIA REAL HEALTH The cost of surgical and medical treatments availableprivatelyinNew Zealand arerising, and newcancer treatment medicines are being developed. Futureproof your health challenges by ensuring youhaveaccess to the next generation of immunotherapy cancer drugs. $500,000 Limit Surgical. Medical. Cancer. REAL Products. REAL Benefits. Contact your financial adviser or phone 0800 800 242 to find out howyou canfutureproof your health today. Terms, conditions and usual, customary and reasonable rules apply. Please referto the policy wordings for full details. aia.co.nz
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