The end of the financial year (FY) is a crucial time for businesses, not only for tax compliance but also for ensuring financial stability and strategic planning. Cash flow, in particular, requires close attention, as it directly impacts business operations, profitability, and overall financial health. Here’s why businesses must prioritise cash flow at FY-end and how they can improve it.
1. Meeting Tax Obligations & Compliance
At the end of the FY, businesses must settle tax liabilities such as GST, income tax, and provisional tax (if applicable). Poor cash flow management can lead to difficulties in meeting these obligations on time, resulting in late payment penalties and interest from the IRD. Additionally, tax planning strategies, such as prepaying expenses or deferring income, require a clear understanding of cash reserves to be effective.
2. Settling Debts & Liabilities
Businesses often need to clear outstanding supplier payments, loan repayments, and payroll obligations before closing their books. Inadequate cash flow can lead to delayed payments, damaging supplier relationships and affecting credit ratings. Ensuring a steady cash flow helps maintain strong business relationships and financial credibility.
3. Assessing Profitability & Performance
Cash flow provides a real picture of financial health, helping businesses understand whether they have sufficient liquidity to operate smoothly into the next FY. It is important to note that profit does not equal cash flow. A business may report a profit on paper but struggle with cash shortages due to unpaid invoices or excessive inventory.
4. Managing Accounts Receivable & Payable
Year-end is an ideal time to review outstanding invoices and ensure that incoming cash is collected before closing accounts. Efficiently managing accounts payable is equally important. Businesses should assess supplier payment terms and negotiate better deals if necessary to avoid cash crunches.
5. Making Investment & Growth Decisions
A strong cash position enables businesses to make strategic investments in new equipment, hiring, or expansion. Conversely, a weak cash position might indicate the need to cut costs or secure financing before running into liquidity issues. Evaluating cash flow at FY-end helps businesses make informed decisions about future growth.
6. Budgeting for the New Financial Year
Analysing year-end cash flow is crucial for forecasting and planning the upcoming year. Businesses can use this period to create financial buffers for unexpected costs, adjust pricing strategies, cut unnecessary expenses, and improve collections. A well-planned budget ensures financial stability and resilience.
7. Avoiding Financial Stress
Running out of cash at the end of the FY can cause immense stress for business owners and employees. Maintaining a healthy cash reserve prevents last-minute borrowing at high-interest rates or defaulting on obligations, ensuring smooth operations and financial peace of mind.
How to Improve Year-End Cash Flow
To strengthen cash flow at the end of the FY, businesses should consider the following strategies:
- Review and chase overdue invoices: Implement stricter credit terms or offer early payment discounts to encourage faster payments.
- Delay non-essential spending: Postpone large purchases unless they provide immediate tax benefits or are critical for operations.
- Optimise inventory management: Avoid excess stock that ties up cash and focus on fast-moving products.
- Negotiate with suppliers: Extend payment terms where possible to improve cash flow flexibility.
- Plan tax payments early: Work closely with an accountant to estimate tax obligations and avoid unexpected financial burdens.
The content in this blog is intended to provide general insights and should not be regarded as professional advice. Each business situation is unique, and we recommend consulting with a professional for specific guidance. At Black Arrow Business Studio, we specialise in accounting and consulting services designed to support your business’s growth and success. Feel free to contact us for expert advice and customised solutions.
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