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Insight, news and updates from Alliott NZ Chartered Accountants, Auckland New Zealand. The views expressed here are the views of the author and should be discussed in further detail should an article be relevant to your individual circumstances.

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Understanding Volatility in Your Business

Posted by Vanessa Williams on July 27th, 2022.      0 comments

With recent events, continuing economic uncertainty, volatility continues to be a major challenge to businesses

William Edwards Deming expressed the theory of volatility as:

“Volatility is expected and carries with it a degree of predictability; understanding the nature of your volatility is key...”

volatility newspaperCauses of Volatility in your business can be:

  1. High Frequency – Low Impact. (eg Retail store - rainy day)
  2. Special Cause: Low Frequency - High Impact. (eg Earthquake or Pandemic)
  3. Seasonal: Predictable Patterns & Trends (eg Selling ice cream in summer vs. winter)
  4. Tampering: Data Misinterpretation & Response (eg Wrong conclusion = wrong actions)

It is therefore important to identify and understand the causes of the volatility in your business and develop a plan to deal with it.

The first crucial step in identifying the cause is obtaining the relevant data to analyse. The data must be recent and accurate such as:

  • Monthly Accounts. Some of you may only be obtaining annual accounts or quarterly accounts. In times of volatility, a move to more frequent and timely financial information can be critical to identifying trends and providing information necessary for good decision-making. Knowing where you are month to month gives you more control over the business and can re-affirm your strategies are working
  • Forecasting and Budgets. Looking forward rather than back is also key in mastering the rapids ahead. The use of tools like Spotlight Reporting which can be extracted from Xero allows easy forecasting and scenario planning to see the financial effect of decisions. Budgets are also key in obtaining funding with most banks making them a requirement for additional lending.
  • Cash Volatility. Is your cash flow constant from month to month or are there severe peaks and troughs? Why is this? Have you mapped your cash flow throughout the year? Do you have a cash flow for the year ahead? Again, also important for funding requirements, it also helps you manage the money to cope with the swings.
  • Calculating Debtors Days. How long are people taking to pay you? Is this stretching out? How can you get the money in quicker?
  • Calculating Stock Turnover. With longer supplier lead times are you having to hold more stock? Is this placing pressure on cash flow?
  • Sales Patterns. What activities or initiatives can help fill the holes?

Capturing, analysing and understanding what the information means can help formulate your game plan.

Alliotts can assist you at any stage of this process. While it may seem like additional unnecessary cost, this can be a lifeline to managing the volatility or even keeping a business afloat.

 

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