The current interest rate reduction predictions of early next year are still optimistic.  The reality is that the economy is staying just strong enough that the most likely outlook is that interest rates will stay where they are for the foreseeable future. 

Higher interest rates suck vital cash flow from your business.  Managing your business on the basis of optimistic predictions is dangerous. It is like allowing your business to hemorrhage, while you watch on.

Interest costs have doubled over the past year.  With business interest rates at around 8% they are now a major expense item for many businesses.  There was a saying that it was smarter to use other people's money to fund your business. The current level of interest rates now make that a myth. 

What has exacerbated the high interest problem is that inflation has come down.  Whereas when interest rates first went up you could put your prices up by 5% or more and cover much of the interest cost.  Now with inflation down to 3.5% the ability to lift prices has come down, but interest rates have not come down.  Your business is caught in a pincer. 

What should you do to keep your cash flow intact and your business strong?

Sell unnecessary assets: 

If you have machinery or property that is not core to your business, consider selling it, especially if it has a loan attached to it. Selling this will remove the loan and may also give you additional funds to reduce other debts.

When purchasing an asset consider the ROI (return on investment):

Will the asset give you a good return on your investment?  As a rule of thumb ask:  will the asset pay for itself in 3 years or less? Also consider whether you can pay for the equipment from cash flow. Do not buy business assets that feed your ego, such as big expensive utes. 

Being smart with your working capital: 

Making a profit is important to cash flow.  However it does not guarantee cash flow.  How you manage your debtors, stock and work in progress can make an even bigger difference. 

Debtor Control:

Is there room for improvement in your debtor control?  Do you get part of your customer’s invoice upfront, while you wait for the goods to arrive or finish the job? 

Stock Control: 

With stock more difficult to get, you need to have adequate levels to make the sales.  However, do you only keep the stock that customers regularly need? 

Likewise work in progress should be kept as low as possible. If it is too high, consider progress payments. 

Making good use of Cash Flow you generate: 

With the cash flow generated it is important to have a buffer. Two months of overheads is a good rule of thumb.  However if your loans have a redraw or offset facility this is a way you can keep the interest down and have access to your cash reserves if needed. 

If you cannot get a redraw facility on your loans then carefully consider whether it is wise to use some of the cash flow generated to reduce debt. 

Alternatively you could hold the surplus cash in a high interest account, such as a cash management account or term deposit and earn around 5%. 

Cash Flow is the lifeblood of your business.  Persistent high interest rates are adding a significant pressure to business cash flows.  What is the state of your cash flow?  How could you reduce the interest rate pressure and strengthen your cash flow?