Proactive cash flow strategies to minimise risk and keep New Zealand businesses thriving.
For many New Zealand business owners, every project represents a leap of faith—an investment of time, money, and resources with the hope of future payment. However, when payment is delayed, the business owner finds themselves edging out further on a precarious financial plank, with the waters below teeming with risk and uncertainty.
The analogy is stark but fitting. The longer the delay between a business’s investment and receiving payment, the greater the risk. A slow-paying client, an unexpected dispute, or a sudden market shift could be the tipping point that sends a business overboard. Fortunately, there are practical steps businesses can take to regain control of their cash flow and step back from the edge.
Shorten the Payment Cycle
The first step in protecting your business from cash flow risk is to shorten the time between completing a job and getting paid. Here’s how:
Immediate Invoicing: The faster you invoice, the sooner you can collect payment. Delaying invoicing only extends the financial risk. It’s critical to make invoicing a priority. The longer you wait, the further you’re out on the plank, increasing your exposure to potential cash flow disruptions.
Shortened Payment Terms: Traditional “20th of the following month” terms can leave businesses waiting weeks to be paid. While this may be common practice, it’s not always necessary—especially with residential and private clients. There’s no reason why a private client should be given a 20th of the following month invoice, consider shorter terms, like seven days or payment upon completion, to keep your cash flow moving.”
Securing Payments in Advance for Costly Materials and Components
A critical factor in maintaining cash flow stability is securing payments for expensive materials or components upfront. Here’s why it matters:
Advance Payments Reduce Risk: When a project requires high-cost items or components, requesting advance payment protects your business from carrying the financial burden. This practice ensures you aren’t out-of-pocket before the project even starts.
Example: A contractor sourcing costly materials for a construction project can request an upfront payment to cover these costs. This approach not only reduces financial strain but also maintains positive cash flow. It’s about protecting your business from unnecessary risk, By securing advance payments for large costs, you create a buffer that keeps you cash flow-positive.
Milestone Payments for Long-Term Projects: For projects with multiple phases, structure payments around milestones. This allows for continuous cash inflow and mitigates the risk of client defaults or late payments. “Breaking down payments into milestones keeps everyone accountable and ensures cash keeps flowing,” Curwood notes.
Deposits and Pre-Payment Policies
To further reduce financial exposure, consider implementing deposit and pre-payment policies:
Standardised Deposits: Make it policy to require a deposit for substantial projects. Deposits provide a cash flow buffer and demonstrate a client’s commitment. Deposits give you breathing room, It shows the client is serious and helps you cover initial costs without taking on all the financial burden.
Pre-Payment for High-Cost Orders: For jobs involving significant expenses, consider requiring partial or full pre-payment. This approach shifts the financial burden away from your business and maintains cash flow stability.
Clear Communication of Payment Terms
Establishing and communicating clear payment terms with clients is key to avoiding misunderstandings and ensuring timely payments. Set expectations from the start, when clients understand your terms, there are fewer surprises and fewer delays.”
The Reality of Cash Flow Challenges in New Zealand
Recent data underscores the severity of cash flow challenges faced by New Zealand’s small businesses. According to Xero’s Small Business Insights report, late payments cost Kiwi businesses approximately $456 million annually, with those receiving 60-80% of payments late experiencing 19% more cash flow crunches than those paid on time (Xero, Small Business Insights Report, October 31, 2024). Moreover, the average small business in New Zealand operates with negative cash flow for a third of the year, and 17% experience cash flow shortages for more than six months annually. These challenges highlight the urgent need for proactive strategies to mitigate risk and maintain financial stability.
Practical Steps for Business Owners to Protect Cash Flow:
1. Require Deposits and Advance Payments: Implement policies that require upfront payments for expensive materials, components, or high-cost projects.
2. Shorten Payment Terms: Offer shorter payment windows for residential and smaller projects, such as “due on completion” or within seven days.
3. Invoice Promptly: Use automated tools to issue invoices as soon as work is completed.
4. Set Clear Expectations: Clearly communicate your terms of trade with clients to minimize delays and ensure a shared understanding of payment requirements.
Final Thoughts
By proactively managing cash flow and reducing payment delays, New Zealand business owners can step back from the financial “plank” and operate with confidence. From requesting upfront payments to reducing payment terms, these measures help protect your business and keep it resilient, It’s about staying one step ahead of risk and focusing on growth and stability.
Link for source information from xero https://www.xero.com/nz/media-releases/nz-small-business-data-declining-sales-slower-wage-growth/