For most of us, Christmas is cause for festive spirit and celebration. For business owners, it is not quite the same. The ruling spirit might be one of unease and even serious concern because Christmas brings with it a traditional cash flow squeeze for businesses. The concern is probably heightened this year, given the soft economic conditions.
Last month, a survey by Regus , a global workspace provider, found cash flow to be the top concern of startups and SMEs, amid a broad global slowdown. As much as 57% of Australian business leaders in the online poll listed it as the biggest barrier to their growth.
“Like last year, we are entering the festive season with retail figures remaining weak, a string of major insolvencies, a slight rise in unemployment and tightening of credit and bank overdrafts,” says Gary Green, director of Bibby Financial Services Australia, a specialist provider of cash flow and working capital solutions.
The average small business now waits almost twice the standard 30 days for payment of invoices and business insolvencies are still relatively high, partly because of the ATO’s reduced tolerance of tax arrears and a general tightening of trade credit from suppliers, he adds.
So how can businesses manage the traditional Christmas cash flow squeeze? Here are five tips from Green to tide over a potential crisis:
- Start now. Unless you are an ice cream seller with brisk trading over Christmas and into the New Year, you need to start now to cover costs and maintain strong cash flows when business is traditionally quiet.
- Stay alert. Business owners need to exercise extra vigilance in managing their working capital and monitoring cash flow.
- Plan. Cash shortages are likely during the holidays because, well, accounts staff are simply harder to get hold of. So plan taking into account cash shortage. Without that, businesses may be hard up paying the first tax bill in the new year.
- Startups, wake up. Fast-growing startups face higher risks than others simply because credit management has probably been a low priority in the rush to grow. So look out for blowouts in payables and receivables, and increased financing costs that squeeze margins. You might have to cut sales or better still, find ways to fund working capital.
- Debtor finance.A growingly popular, but slightly more expensive, option to surmount cash flow issues is debtor finance, also known as invoice financing or factoring. It allows a business to quickly convert its unpaid invoices into cash, and is in effect a line of credit extended against the business’ receivables, often one of the largest current assets on the balance sheet.“Debtor finance is a versatile funding arrangement, suiting a wide range of businesses and industry sectors – from small start-ups to established listed small cap companies, from manufacturers and wholesalers to business service providers,” says Green. Retail, construction and IT-related services are not suited to debtor finance.
“Cash flow is king, and so monitoring cash flow in the current environment should be a high priority. Should your business be facing any immediate or anticipated cash flow shortage, having a closer look at debtor finance could be a good idea,” Green says.