We are feeling the winds of economic change. What are the signs in your business?

As I write, the inflation for this quarter is 6.9% which doesn’t seem to ring true given fuel, food and any imported products are all experiencing double digit inflation.

The side-show that is COVID-19 continues to disrupt with workforces reduced and productivity decimated. Nowhere is this more evident than at the Ports of Tauranga where loading times are down by 25%, despite high demand.

Our focus needs to be on reading the game:

·         Low productivity

·         Skilled and unskilled labour shortages

·         Wage pressures

·         Domestic and global supply chain issues

·         Rampant inflation

·         Rising interest rates

In 2020/21, Kainga Ora, the Government housing arm delivered 2,432 new houses[i] and is upgrading its existing stock. With borders closed, this means the Government is directly competing with the domestic and commercial builders for plumbers and electricians as well as for construction materials. To add fuel to the fire, Gib Board is in short supply with New Zealand’s largest producer claiming it does not have a monopoly despite having a 96% share of the market.

Most economists expect a net population loss when borders open and this looks likely. Several of our clients have spoken about their highly qualified adult children already being offered employment by hospitals in Australia and financial services in Hong Kong.

On the banking front, we are seeing increased scrutiny of lending applications, rising bank charges and more hurdles for first-home buyers.

So, should we all be throwing in the towel, petitioning the Government for more public holidays so we can head to the beach before global warming sees the bach under water? No but we need to be a little more careful of the fundamentals.

This year is the year of equity and cashflow. Owners’ equity is defined as the value owned by the owner as a percentage of the total assets. Equity levels above 65% provide owners with a solid foundation that can be leveraged, and should be providing sustainable cashflow.

Equity + Cashflow = opportunity.

While we cannot control the economy and monetary policy, we can identify the hard and soft key performance indicators in our business and manipulate those through strategy and action. For example, staff retention and productivity are significant and immediate issues for many organisations. However, as business owners we can invest in frequent, quality staff communications, put in place career paths for each team member and introduce flexible working conditions. For the majority of team members, remuneration is seldom the reason for leaving a job (which is good news for employers).     

When I am working with manufacturing clients, we look at the overall volume, value and frequency of orders received as well as individual customer behaviour. Are your ‘A’ customers still transacting with you in the same way? What is the relationship like between your sales team and your customers? We also look at operational processes such as turnaround or production time (some times called through-put) as well as work in progress (materials and labour have been used but the work cannot be billed yet).

Pricing is another significant issue as businesses grapple with rising material and labour costs, compounded by supply chain issues, fuel prices and inflation. Are you on top of passing price rises on?

Banks have been happy to provide trade finance on the basis that businesses can only continue to trade if they have inventory. However, if demand falls, then cashflows will be squeezed which becomes more problematic if customers take longer to pay. Tighter debt control and monitoring will be needed this year to support healthy cashflow. 

Regardless of what industry you operate in, whether you are in wholesale or retail, bricks and mortar or online, identifying and monitoring the key cashflow levers in your business is critical. Moving to understanding your business performance in real time is needed to let you make decisions at the right time – not a year later when looking at your accounts with your accountant!

[i] NZ Herald 13 April 2022

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