The best-laid plans: Adjusting your expectations as the financial year unfolds

They say life is what happens when you’re busy making other plans, and that’s certainly true when it comes to your cash flow plan.

Believe it or not, we’re already almost halfway through the financial year. The second half of the year is shaping up to be an eventful one – and if you spend the next six months clinging to your current expectations like a security blanket, you could be in for a bad time.

Here’s what’s in store for the second half of the financial year, and what it means for your projections.

In this article:

What’s going on with the economy?

Look, we’ll keep it 100 – the outlook isn’t great, with the World Bank, the International Monetary Fund and the UN all warning that we could be headed for a global recession soon.

The World Bank’s report points out that global consumer confidence is already in a much sharper decline than it was in the run-up to previous global recessions, while the UN Conference on Trade and Development went so far as to say the impending global slowdown could inflict worse damage than the financial crisis in 2008 and the COVID-19 shock in 2020.

Central banks around the world, including our RBA, have been raising interest rates this year in response to rising inflation with an almost unheard-of degree of synchronicity. These rate hikes are meant to slow the economy down by discouraging discretionary spending, which is supposed to have the effect of reducing inflation.

But even with all of the world’s central banks hitting the ‘raise interest rates in case of emergency’ button at the same time, the World Bank warns it may not be sufficient to bring global inflation back down to pre-pandemic levels. Their study found the global core inflation rate (excluding energy) will be at about 5 per cent in 2023 – nearly double the five-year average before the pandemic.

That means central banks are likely to keep raising their interest rates well into next year, and the economy will keep tightening, with the World Bank warning that even a moderate hit to the global economy over the next year could tip it into recession. It’s more than a little bit like a Jenga tower, and any piece could be the one that sends the whole thing tumbling.

Top economist Mohamed El-Erian, the former chair of Barack Obama’s Global Development Council, says the world isn’t just teetering on the brink of another recession – instead, it’s “in the midst of a profound economic and financial shift” that will “outlast the current business cycle”.

He puts this down to three transformational trends. The first of these has been the disruptions to the supply chain, driven by Russia’s invasion of Ukraine and labour shortages in the wake of the pandemic, that have led to high food and energy prices and a worldwide shift from insufficient demand to insufficient supply.

The second trend is that central banks around the world have been too slow to recognise inflation creeping in, and are now raising rates steeply to make up for lost time.

And the third trend – which is really the result of the first two – is that financial markets have grown increasingly volatile, as investors worry that rates will be kept higher for longer than would be good for the economy.

Locally, the government says it doesn’t expect Australia’s economy to go backwards, but Treasurer Jim Chalmers admits the world economy is in “a dangerous place right now”.

With the RBA continuing to raise rates and with ANZ-Roy Morgan consumer confidence data down significantly from where it was a year ago, it seems like a bold move to assume it can’t happen here, even if Australia manages to avoid the worst of it.

What does all of this mean for you? Well, a recession usually means falling retail sales, high unemployment, and an increasing number of businesses that are unable to pay their debts – so if you had a particularly optimistic outlook at the start of this financial year, it might be time to adjust your expectations.

Should I adjust my projections?

Every business needs to have a cash flow plan in place to help them understand how much incoming cash they need to cover their outgoing expenses.

your cash flow plan

Cash flow plans are usually built for a 12-month time period, and they require you, your accountant or CFO to develop estimates with regards to your future income and expenses. You also need to take seasonal variations into account, so if you specialise in selling Santa hats, for instance, you should probably project to have more incoming cash in December than June.

At SBO, we develop three-way financial models for our clients that consolidate their Profit & Loss, balance sheet and cash flow projections together, so we can forecast their financial future and project how certain scenarios will affect their bottom line.

But here’s the thing – no matter how informed they are, estimates are still just estimates. And whatever form your cash flow plan takes, you need to remember that it’s a living, breathing document.

It should be evaluated on a regular basis, and updated when necessary. The midpoint of the financial year is a great opportunity to take a good, hard look at how your actual performance is matching up to your projections – especially this year, when changing economic conditions might be a factor in you not hitting your targets.

If you find you’ve gotten off-track, it probably doesn’t mean you need to close up shop. It probably just means you need to go back to the drawing board and adjust your expectations to make sure they’re still realistic in the current climate.

There will always be unforeseen circumstances that you couldn’t have planned for – and that’s okay, as long as you adjust for them. What’s not okay is clinging to static documents based on forecasts that are six months out of date, because in that case, you may as well not have a cash flow plan in place at all.

What adjustments can I make to improve my cash flow?

If you find you’re not going to be bringing in as much money as you thought you were, then you need to take steps to improve your cash flow in the second half of the financial year.

First off, see if there’s any fat you can cut – are you drowning in superfluous subscription fees for SaaS products you never use? Are you spending money on travel when a Zoom call would do? Look for the easy goals and kick them now.

In order to make more improvements to your cash flow without cutting more costs, then you need to look at your cash conversion cycle. This is a metric that measures the liquidity of your business in terms of the amount of days it takes to convert your profit into cash – the lower the number, the better.

accounts receivable days graphic

Accounts Receivable Days

Do you have customers who are habitual line-steppers, forever late with their payments? It’s time to pick up the phone and get them to pay their outstanding account.

If you know they’re doing it tough, you can offer them a payment plan and get them to commit to a small, affordable weekly repayment, so you’ve at least got some cash coming in now. But you need to be strategic – don’t offer this to high risk customers that are likely to go broke before you get your money.

Of course, your accounts payable are someone else’s accounts receivable, so you can expect to be on both ends of these conversations as pursestrings tighten.

Inventory Days

You’ve probably heard of the 80-20 rule. It’s the idea that 80 per cent of outcomes result from 20 per cent of inputs.

The goal of the 80-20 rule is to find your most productive products, and make them your priority.

To do an 80/20 analysis of your SKUs, rank them by:

a) High volume, high percentage margin
b) High volume, low percentage margin
c) Low volume, high percentage margin
d) Low volume, low percentage margin

Clear out SKUs that fall into the d) bracket at a discount to make room for the products that actually sell, and focus on re-ordering only the SKUs that fall into the a), b) and, to a lesser extent, c) brackets.

The objective is to focus on products that move quickly, and maximise gross profit dollars to the business.

The same principle applies in service industries – in that case, it’s about focusing on your services and clients with higher margins, and ditching the ones who aren’t worth your time and effort.

Accounts Payable Days

While we want to decrease our Accounts Receivable Days and Inventory Days, we want to increase our Accounts Payable Days.

Talk to your creditors where possible, and start with your big suppliers. You might be able to secure some friendly credit terms to help you get through a lean period. Be honest about your situation. If you have 15 days to pay, don’t be afraid to ask for 30 – the worst they can do is say no.

Depending on your situation, you can also talk to your landlord about a rent deferral, and ask about your bank’s financial hardship options. This is where your cash flow plan is key, because you can refer to your projections in conversations with your landlord and your bank manager to give them an overview of your financial situation.

You can learn more about how to prepare your business for an economic downturn, including how to restructure costs and how to ‘rightsize’ rather than downsize, here.

And of course, we’re always here to help – so just reach out to us here at SBO Finance if you need help getting back on track for the rest of the financial year and beyond.

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This article was updated on 17 May 2024.  It’s not…