Understanding your level of financial commitment

Understanding your business’s financial commitments | Prospa NZ

As a small business owner, it’s easy to love watching the takings from a particularly good week of trade or a big sale come flooding in.

As pleasant as this is, it will only ever tell half of the story unless you’re also closely watching what debts, bills and other financial commitments are coming due.

“New and small businesses can be very vulnerable to cash flow issues resulting from not understanding their level of financial commitment,” says Arpit Nagpal, a registered financial adviser from Aarit Finance Limited.

“Many people see an opportunity and jump on it, without working out if it’s a suitable opportunity, whether they can commit to it long-term and how they will manage their financial commitments as a result.”

Financial commitment and cash flow

Financial commitments are pledges to meet certain expenses in future. They can include your rent, utilities, insurance, loan repayments and tax bills.

Inland Revenue Department (IRD) spokesperson, Gay Cavill, says when small businesses have a good understanding of their financial commitments, they are better able to plan, expand and succeed in business.

“Knowing financial commitments that relate to your specific small business industry, your business cycle and the stage of your business, will see your business better placed to meet its commitments as they fall due,” says Cavill.

Nagpal adds that being well aware of your financial commitments – and limits – will usually translate into a business that boasts a healthy cash flow.

“If you’ve got a liability coming up in a few months’ time or a year, you need to be thinking ‘how much funds do I need and how can I achieve that?’” says Nagpal.

A 5-step financial commitment planning process

Here’s how Nagpal recommends businesses plan for regular financial commitments in five simple steps:

  1. Identify your financial commitments: make a list of all business activities that trigger financial responsibilities. This could include employing staff (wages and super), opening your doors (rent/mortgage repayments, insurances, utilities and subscriptions) and tax obligations.
  2. Save the dates: identify when each of these obligations is due, set yourself reminders. (Here’s an infographic with the key 2019-20 end of financial year dates you need to know).
  3. Do your sums: next you need to calculate how much each of these financial responsibilities is going to cost you. Adopting good record-keeping practices and leveraging digital accounting software, can help you to regularly estimate the cost of your obligations. Review your obligations every quarter or six months. And keep a buffer for unexpected expenses.
  4. Set aside funds: separate your business finance from your personal finance and dedicate a certain business account (or accounts) to meeting your financial commitments. Regularly move the estimated cost of obligations into that holding account. Nagpal says strategies for meeting commitments can include ramping up your savings and finding new opportunities when business is quiet.
  5. Pay on time: avoid penalties – and take advantage of potential discounts – by paying on time.

Keep a close eye on your financial obligations

As a small business owner, it can be tempting to focus on the sexier parts of your business: the marketing, the networking, the graphic design, the website tinkering.

However, all too many businesses overlook the importance of cash flow, budgeting and planning, and by the time it’s finally caught their attention it can be too late.

“It’s important to know when to seek assistance, funding and/or investment into your business before things start to go wrong,” Cavill says.

Nagpal adds: don’t be afraid to reach out for help.

“Sometimes you need to raise a flag to say ‘yes I need help’,” he says.

Want more tips on making your business as fighting fit as possible? Sign up to the Prospa Blog email.

The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information as at the date of publication, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information for any reason, including due to the passage of time, or any loss or damage suffered by any person directly or indirectly through relying on this information.