Six steps to avoid the post-Christmas cash-flow blues

Many businesses shut over Christmas. But they still have to pay wages (plus leave loading) despite a lack of fresh customers, so it’s no wonder many businesses feel the squeeze in January.

The start of the year is a busy time for debtor finance company Scottish Pacific, head of product development Wayne Smith tells SmartCompany.

“Not every business suffers, but it is something we see a lot of,” he says.

“Most businesses wait 30 or 45 days to be paid, and because they’ve been shut, they have no invoices to collect over this period,” he says. “That means a smaller amount of cash flowing into the bank account. And given it coincides with their needing to make a BAS statement and pay taxes to the ATO at the end of February, it can be a challenging period

“It’s not uncommon for successful businesses, experiencing high growth, to run up ATO debt because they didn’t have the real estate to help them secure traditional bank facilities and they simply weren’t aware of alternatives.”

Smith has six ways SMEs can survive the period.

1. Speed up your collections cycle

According to Dun & Bradstreet figures, SMEs are waiting more than 50 days to be paid.

Bringing this figure down, even a small amount, can have a dramatic impact on cash flow, Smith says. “For example, a business turning over $10 million, reducing debtor days from 60 to 55 days achieves a cash inflow in excess of $135,000.

“Often something as simple as improving paperwork (making sure invoices show all the relevant information required by the customer to make payment), sending timely reminders and putting in place a disciplined reminder call program) will help reduce debtor days.”

SmartCompany has some further tips on how to get customers to pay on time here.

2. Large order? Take a deposit

This limits your outlays on production costs, Smith says.                               

3. Look at working capital solutions

Smith says 4500 Australian SMEs use debtor finance, which involves borrowing against the value of invoices. Such financing is typically issued with 24 hours of an invoice being received, and so can help smooth over any cash-flow troubles when they occur.

“Debtor finance is for businesses that sell to other businesses on standard trade credit terms. It is particularly useful for labour intensive businesses where wages have to be met well ahead of payment receipts,” Smith says.

Another potential solution is trade finance. This provides lending to bridge the gap between when a business pays its suppliers and when it gets paid by its customers.

4. Check your stock levels

Careful stock management can be a good way to free up some cash.

“Having too much stock on the floor means you may have unnecessarily depleted your cash reserves,” Smith says. “If you have stock that is in danger of becoming obsolete don’t be afraid to sell it off cheaply to turn it in to cash.”

5. Negotiate with your suppliers for longer payment terms

Building good relationships with your suppliers makes this possible.

6. Consider offering discounts for early payment

This can mean less money to your business in the long term, but if you need to ease the cash-flow squeeze, it is always an option.