The period prior to and following the festive season is probably the most challenging time for any SME business from a cash flow management perspective:
- The rush to maximise sales leads to working capital being used intensively. At this time, overtrading can become a very real risk
- Additional demand means additional delivery and vehicle maintenance costs, vehicle maintenance costs, inventory costs and other costs
- Extra staff may be put on to cope with the demand (particularly temporary workers) which means extra cost and extra strain on cash flows to meet payroll
- Additional administrative costs associated with processing more work orders
It is a period when owner managers are particularly short on time and the risk of ‘taking the eye off the ball’ is probably at its highest.
After this cash-intensive period of course, the Australian business community shuts down over January and early February. When invoices become due and payable, this is the time at which accounts payable staff and their managers go on annual leave, so it can be very difficult to speak to the right people and ensure the business gets paid. Then, to make it especially challenging, the first BAS submission deadline is in late February. It is a scenario which catches even the most experienced business owners out, and regrettably sometimes it has dire consequences.
How can you weather proof your business?
For many businesses, particularly seasonal ones, it is critical that measures be put in place to help the business through such difficult times. FactorONE has prepared a short checklist of such measures:
1. Revisit your cash flow forecasts – do the figures make sense, assumptions correct and are they still current? What investments can be deferred to months in which cash flows are stronger?
2. Review your accounts receivables and sales order processes – Are the processes you have put in place being followed? Is your paper trail as strong as it could be? Are your invoices clear and contain all the required information to encourage prompt payment?
3. Incentivise your accounts receivable staff – Reward your AR staff with a specific bonus if they keep debt turn at a satisfactory level, to ensure your business isn’t caught short which could trigger a cash flow crisis.
4. Consider Invoice Finance or another cash flow finance solution – Sometimes even the most efficient cash flow management processes may not improve your cash position but only work to ensure it doesn’t deteriorate. Invoice Finance, which provides an advance of up to 80% against credit sales, can provide your business the access to cash when it is needed to guide the business through the challenging festive season. Some providers provide a ‘one off’ advance against one or a small number of invoices of your choosing.
5. Manage your inventories carefully – Ensure you have a plan to sell down any excess inventory and be proactive when faced with slower-than-expected sales result on specific product lines.
6.Choose a lender who will offer you an umbrella in a summer storm
Comparing lenders on a basis of fees can seem very straightforward, but it is how the funding is delivered and how that lender will support you that can make the difference. Not all lenders will be tolerant of that temporary ‘cash flow blip’ or a loss, so it is important you choose a lender who is best suited to the way your business trades, and who can demonstrate flexibility when times are tough.
Successful navigation of this challenging period often comes down to good planning, so set some time aside before peak periods to consider what might be put in place to manage cash flow. How you trade through this period may be the difference between a good year and best year the business has ever had.
