March is consistently the worst month of the year for company insolvencies. Why? Because businesses don’t plan for the inevitable drop in cashflow over the holiday period. Tim Lea offers some great advice on how to keep all the balls in the air while you and your customers are enjoying the summer break.
The holiday season is looming large and with it the parties, the networking opportunities and tales of good cheer. While the hangovers will be temporary, there is a more serious issue that all of us need to face: this is the worst time of the year for corporate cashflow.
For the last five years, March has almost consistently been the worst month in the year for insolvencies. According to the ASIC statistics, this year there were 1,095 External Administrations in March, up from about 668 the previous year. Now given 2009 has been the first full year in which we have seen the effects of the downturn associated with the Global Financial Crisis, next March could be even worse, as battered balance sheets, reduced margins and tightened bank credit take their toll. So why March?
What the holiday season means to all of us
- We all have two weak sales months in December & January.
- We all still have overheads we have to pay.
- Businesses stop paying each other from early December until mid February — it’s a regular cycle, especially big companies where the key people who sign off on your payments are on holiday.
It becomes a vicious circle — nobody pays anybody because nobody has been paid, and this cycle isn’t normally broken until mid-February. As a result, those companies that are already in a very weak position often decide to call it a day. Or a significant creditor, the ATO or bankers lose patience and the rest is history.
Here’s an example of what can happen.
In late January this year, a civil engineering client emailed us on a Wednesday night. The Finance Director of their largest customer was on two weeks leave, resulting in no one being able to sign off on a significant interim payment, which the client urgently needed to pay his staff wages on the Friday. It was a very uncomfortable situation.
Now to get cash in two business days from a professional lender is almost impossible. But because we work with working capital lenders all the time, we called in a favour and secured a facility against two of the client’s outstanding invoices, securing a small $70k facility in less than 48 hours to get the client through this difficult time. It was expensive, but the alternative was worse — a building site with no staff and a broken contract had the potential to be terminal. With some careful planning this sort of experience can easily be avoided.
Nobody plans to fail, they only fail to plan
They key advice I would offer anyone in business is to get your house in order before the holiday season really starts.
- Plan your cashflow until at least 31 March 2010 and work out where your gaps lie.
- Get solid credit control structures in place. If you are selling now, ask when you can expect payment and try to get commitment from your customers to pay prior to Christmas. (If necessary, negotiate an early settlement discount.)
- Chase outstanding debts hard now to hit the payment runs at the end of November — otherwise, you may not get paid until mid-February
- Chase any old debts hard before Christmas — otherwise, they may turn bad next year.
- If you need to borrow, get your application in place ASAP. This time of year all lenders get backed up as so many companies try to get finance before the year end. Decisions are always delayed.
The GFC has made it harder to raise finance, resulting in:
- Increased rejection rates
- Increased costs
- Delays in decision-making — as a result of banks shedding 10-15 percent of their workforces.
If you need to borrow additional cash:
- Approach your bankers before a problem arises, not as it arises. Lenders like to see a proactive approach to borrowing and hate surprises or being forced to make difficult decisions — their easy decision will be no!
- You might want to consider multiple applications for funding. Just be aware that banks are very cautious at the moment about “new to bank” facilities.
- You might want to consider alternative sources of finance that don’t require real estate security — for example, factoring and inventory finance. After all, if your bank turns around and says no, you don’t want to be left high and dry.
Because the next four-to-five months could be potentially difficult for all of us, it is essential that you plan your cashflow to at least to the end of March 2010 and instigate appropriate measures. If you don’t, you might have an uninvited guest — an insolvency practitioner — at one of your Christmas parties. Or worse, when you return in 2010.
Tim Lea is a partner at Cash Stream Financial, a boutique advisory and brokerage specialising in working capital. He has 23 years experience in cashflow finance and is a published author on Factoring and Invoice Discounting.