Economic Uncertainty Highlights The Importance of Positive Cash Flow

Debt levels are the normal focal point when talking about financial vulnerabilities. 

An under-appreciated reason for business failure is a lack of working capital, i.e., the cash to manage short-term commitments and operations.

Having sufficient working capital and cash flow are business basics. 

They will be key areas to watch over the coming months as supply chain challenges, cost and resourcing pressures, and COVID-19 uncertainties persist.

The economy had a roaring first half of the year.  Figures presented in the Reserve Bank’s November 2021 Financial Stability Report showed rising operating profits across industries.  That should have added to cash buffers and liquidity.  We have seen that in business deposit balances at banks with transaction balances for non-financial businesses rising $10 billion to $54 billion in the past year.  Firms have liquidity.

The economy is in good stead but still facing a brutal combination including supply chain disruptions, material and staff availability, rapidly rising costs, and COVID-19 lockdown challenges.  That impacts turnover, productivity, lifts costs, and raises near-term working capital demands.

The economy is a super-tanker.  It can be slow to turn.  You need to watch an array of indicators.

Getting paid is a big one.

Xero’s Small Business Insights data showed a material jump in days to pay in September.  Days to be paid (seasonally adjusted) rose from 24 days in March to 26 days in September.  It hit 30 days in Auckland in September. 

October’s figures were better. Days to be paid eased back down to 24 days nationally, and 26 in Auckland.  All sectors, agriculture, manufacturing, construction, retail, accommodation, and services showed improvement. 

Those figures look good against a backdrop of worsening supply chain issues. 

We also cannot eliminate COVID-19.  It will likely have an enduring impact on consumer spending and business investment though uncertainty surrounds the magnitude.    

There is a seasonal element to sales and growth to manage too. 

The December quarter is the busiest of the year and the worst time to be operating with restrictions or people to be nervous.  The volume of economic activity is typically 5 per cent higher in the December quarter than other quarters of the year and 4 percent above the average quarter.  It is the worst quarter to be facing challenges. 

The economy had great momentum prior to the latest outbreak, and is slowly opening, but is not operating at full capacity.  Electronic card transactions spending lifted 9.5 percent in October though was still 9.2 percent down on October 2020.  The number of transactions is down 16 percent.  Fewer shoppers appear to be spending more on average

Timewise, we are now eating into the busiest quarter of the year, when cash flow for many sectors is generated.

The sectors that show the largest seasonal uplift in the December quarter are agriculture and food/beverage manufacturing.  That is mother nature driving production.  The world needs food.  Prices are elevated and the primary sector is going well.

Next on the list are retailing, accommodation, transport, wholesale trade and a couple of manufacturing sectors including furniture and printing.  Christmas goes beyond retailing.  There is a supply chain that supports it. 

Retail trading activity is typically boosted by around 11 per cent in the December quarter.  The September quarter tends to be a weaker quarter for retailers.  This means the recoil from one quarter to another is typically 15 percent more revenue volume.  That excludes economic influences.  It is purely seasonal. 

It drives cash flow to support businesses for those weaker months early in the year. 

The December quarter seasonal factor for recreational goods, clothing and department stores is around 1.2 to 1.25.  The seasonal uplift is worth 20 to 25 per cent more sales volumes than the average quarter.  But when you come off a seasonally weak September quarter into the summer months the actual seasonal boomerang effect for these sectors is more like 30-40 per cent.

We could go through retail sector by industry, but the picture is similar.  Hardware, building and garden supplies sales in the December quarter are typically 10 per cent above other quarters.  Specialised food, liquor, furniture, electrical all shows a 10 percent seasonal factor.

The economy is in good heart but entering a critical period with uncertainty over how households and business investment will respond to ongoing health and COVID-19 challenges in a key quarter of the year.  Eyes on cash flow metrics.


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