While most Australians revel in the idea of Christmas, summer holidays and a couple of weeks of annual leave, it can be an incredibly stressful time for small business owners because it often comes with serious cash flow issues.
When you’re a small and growing business, cash flow can suddenly seize up at the best of times – sometimes quite inexplicably, but many business owners feel a distinct crunch during December through until February.
The bad news is that it is an industry-wide problem with far-reaching effects.
The good news is that it’s something you can plan for.
At Christmas time, most business-to-business (B2Bs) experience a slow-down.
Plus, there’s shut down period for annual holidays and both of these impact revenue generation. It’s also an expensive time of year in terms of wages (bonuses, special leave entitlements, holiday pay).
Business-to-customer (B2Cs) SMEs are affected too.
Often the pre-Christmas sales rush can seem profitable, but extra stock, extra staff hours, the added expense of casual labour and in some cases the pressure to open longer hours to keep up with consumer demand, can all take their toll on the cash flow.
And even though B2Cs are likely to be paid at the time of transaction, it’s also very tempting to look at all those lovely profits and then overspend, forgetting that the money in the bank needs to be accounted for wisely so that it lasts long term.
For some businesses, the crisis can lead well into the first quarter of the New Year if it’s not managed carefully. In dire cases it can mean that SMEs are left with no option but to secure highly expensive short-term funding (which can further erode finances and be hard to recover from). In other exceptional cases, it can be a precursor to insolvency.
The problem is that because many businesses are suffering the same issue, it has a knock-on effect – everyone is chasing everyone else for money and trying to hang onto their own.
Planning ahead is the key to survival. You need to give yourself time to make appropriate decisions.
Understanding the flow of cash-in and cash-out over the Christmas period will help you predict when the shortfalls will come.
Planning ahead enables you to consider a range of potential scenarios and protect the business accordingly. Forecasting through until March will provide enough of a buffer period if the ‘slow down’ is prolonged and the business will have enough reserves to manage through until trading picks up again.
Taking steps to secure cash flow at this time is crucial, so it can also be wise to put money into a separate bank account where it cannot be accessed for anything else.
In the November/December period it can help to offer early payment discounts as an incentive for getting invoices paid on time. It’s important too, at this time of year to chase payments and get paid before Christmas closure. You don’t want your invoice to be forgotten and left until January when everyone returns for the New Year.
If your forecasts show a likely sizeable shortfall then it’s wise to flag it with suppliers early (to avoid damaging relationships).
Some may be able to offer extended terms of credit. Other options to consider are an overdraft or back up line of credit.
The only way to really mitigate cash flow issues is to tackle them for the long term. And the New Year is a great time to review business planning and finances.
Once you get through the madness of Christmas, take a moment to look at our 5-step process. It will take you through the key components of running a successful, profitable business.
Do you even remember why you’re doing what you do? Or has all the stress and strain drained the passion from your soul?
In our experience, most people venture into business for themselves out of a desire for freedom and independence.
If you feel like these are well and truly lost and you’re now a ‘slave’ to long hours, staffing hassles, and paperwork for little reward whether it be personal or financial, it’s time to reflect and re-assess.
Step two – the second most important thing you need to do: Prepare your financial blueprint. This is about accurate budgeting and forecasting – but more than that, it’s about actually understanding what the numbers mean, and identifying your peak seasons and your troughs and the crazy kinks in your cash flow.
When you have the blueprint in place it’s easier to consider the business model as a whole, and work through potential strategies to improve cash flow, such as getting your clients on regular monthly payments via direct transfer, so you’re paid regularly, 12 months of the year. You could consider asking customers for a percentage payment up front, design shorter payment terms or implement late payment fees.
These two steps will get you started on the right path.
The other three steps in our five step process are about internally organising your business so that it can move to the next level – improving profitability, by tidying up your processes and identifying key priorities, and positioning for sustainable growth by having a strategic, measurable plan to move you forward.
The important thing to remember is that you are not alone. Most small businesses, particularly in their infant years, are juggling a myriad of conflicting issues. But none of them are insurmountable with the right advice, and the right help.
With Christmas now only weeks away, at the very least, getting some short-term plans in place could make all the difference between facing a feast or a famine in the New Year. If we can help, book an appointment.
It’s not too late to salvage the holidays, and with a cash flow plan in place, you will be able to relax and recharge too.