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  • Writer's pictureInteger Investments

How SMEs Can Effectively Manage Cash Flow in a Period of Crisis

Updated: Apr 8, 2020

  • SMEs are the backbone of economies. They provide jobs and drive innovation.

  • However, they are usually exposed to economic deterioration and their financial situation is generally more fragile compared to larger corporations.

  • In this article I explain my take on the NZ situation and how SMEs should prepare for the months to come.

  • This article is part of the initiative of Auckland Business School where we decided to offer pro-bono consulting services to start-ups.

General situation

First and foremost, no-one knows what will happen in the future. The analysis below should be considered guidance on how to prepare for various scenarios. Companies should do their own research, for example on legal implications of their decisions, and due diligence before acting.

Positives: New Zealand is in better shape than many other countries. The government has low debt and is well-functioning. For example, in 2018 NZ had a 20% debt-to-GDP ratio, compared to Europe and the US where countries face debt loads of more than 100%. This means that the government can issue more debt to support the economy. However, in the current situation, the debt is being purchased by the New Zealand Central Bank, with the effect of reducing the exchange rate and increasing inflation risks.

The current COVID-19 economic package is more conservative compared to other countries, so more can be done in the future. Also, NZ has responded to the virus outbreak sooner than other countries and, being a remote island, should be in a better position to insulate itself in the future.

Negatives: NZ is exposed to the world economy. If the world enters a global recession, NZ will be affected too. The exchange rate is rapidly worsening, creating economic imbalances. A negative spiral will be emphasized by the high level of consumer debt. In comparison to the US, the NZ consumer has steadily increased debt loads relative to GDP.

The NZ economy is also centred around sectors that might be negatively affected. For example, construction is 6.4% of the national economy (real estate services add another 7.3%), and tourism constitutes 5.8% of GDP. I expect international travel, tourism and hospitality to be subdued for a long period, maybe 12-18 months. This is due to the likely persistent fear of infections, and to consumer uncertainty that will reduce spending on holidays.

Overall: I expect the NZ economy to do better compared to other economies. However, if the virus situation persists (likely), the country will be significantly affected for a period of 12-18 months.


I will provide a general overview, but the situation varies across firms and sectors. As previously mentioned, firms in certain industries such as construction, real estate and tourism might be affected more than others. Other cyclical industries such as consumer discretionary (e.g. auto sales) might also be impacted. Low-cost restaurants might be less affected than more expensive ones. Take-away might be less affected than dine-in. In general, entrepreneurs should understand how their business can be affected by the downturn, both due to virus fears (e.g. of dining-in) and economic consequences.

The general suggestion is to try and conserve cash, adjusting to the new economic reality through a more agile business model. If business picks up, be ready to serve your clients, but reduce fixed expenses and be conservative. Fixed expenses usually come from two main costs: salaries and rent (or other fixed costs).

Salaries. This is clearly a delicate point. Entrepreneurs should consider a large number of factors in deciding how to move forward with regard to employees. A sense of responsibility toward the enterprise should be balanced with a sense of responsibility toward the families affected. Losing crucial talent might also affect the long-term potential of the business. A number of strategies could be used to both retain staff and maintain the company’s health.

First, the government is offering a wage subsidy scheme. At the moment the program is available to all businesses adversely affected by COVID-19 including the self-employed, contractors, sole traders etc. The current scheme offers weekly subsidies of $585.80 for full-time and $350 for part-time employees. This scheme covers three months of salary in advance and it might be extended (I expect it will happen). I believe that there is no cost so all companies that meet the criteria should apply.

Second, you can reduce the number of hours and days at work. This strategy can be used flexibly to match demand (3-4 days a week). The net impact for your employees is less than the 20-40% reduction since they will pay lower taxes.

It is important to keep in mind that these adjustments will have negative psychological consequences for the employees. It is crucial to increase communication with the employees and explain the rationale for each decision. The entrepreneur should also face a similar if not higher reduction on his/her compensation. Ensuring that employees feel fairly treated is crucial for the long-term success of the business.

One strategy I encourage entrepreneurs to consider is to compensate salary reductions with bonuses (tied to demand/sales) and/or shares in the business. This might both motivate and retain key employees and also reduce cash outflows in the short term.

Businesses might consider applying all the above strategies at the same time (if legally possible). This should provide approximately six months of breathing room.

In some extreme cases, it might be required to reduce the number of employees. It is not recommended to maintain salaries that a company cannot afford. This might be a painful decision, but in some cases this is the only option to keep the company afloat and ensure that the remaining employees have a job. If the company goes bankrupt, all employees will lose their jobs.

Rent. If the economy worsens, landlords will struggle to find new tenants. It might be reasonable to ask for a rent reduction due to these unforeseen circumstances. I would expect landlords to be reasonable and be willing to reduce rent by 10 or 20%; at least in the short term. This might have a substantial effect on certain companies.

Debt. Some companies might be tempted to obtain a loan. The government will probably offer some programs (as in the U.S.) and has currently established a mortgage holiday period. In some cases this might be a viable strategy, but taking further loans is risky as they need to be paid back. They might offer short term relief, but will reduce flexibility in the medium/long term. Ensuring visibility on future cash flows should influence the choice of capital structure. I would use this solution last, and would be very careful with using personal credit in any case.

Equity. Some companies might be able to find equity investors, especially those with technology products or long-term growth potential. However, if the economy worsens, the equity might have to be sold for a low valuation, diluting the entrepreneur ownership.

Cash flow projections. I have developed a cash flow projection that can be useful for SMEs (download the excel file from here). This is a simplified version of a cash flow statement. It will allow SMEs to see how a reduction in revenues and costs will impact their cash position over the next 12 months. It can be easily adjusted for different needs and scenarios. I would be happy to receive feedback or adjust it for particular situations.

Overall, crises offer challenges but also opportunities. As Warren Buffett once said:

“only when the tide goes out do you discover who’s been swimming naked”

I believe the tide is going out now. It is during these periods that stronger companies prevail, or even are born, and take advantage of long-term opportunities. Companies such as Uber and AirBnB were founded during the last financial crisis. Carefully planning for this moment could impact the livelihood of your employees and the success of your enterprise for many years to come.

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