Managing your cash flow in the hangover period

The January to March quarter is a tough cash flow period for every small business.

We call it the hangover period.

Retail businesses have sold all their stock during Black Friday and Boxing day sales and find themselves scrambling to buy more. Services businesses are suffering from a lack of staff productivity during the silly season.

Most people are still on holiday, so the sales pipeline is on hold until after Australia day.

Combine that with: Superannuation payments due late January, December BAS due in late February, FBT due in April, and Income tax return payments due in May; it often results in small businesses suffering large cash flow challenges.

To get through the lean period, you need to first understand your projected cash position.

Forecast your cash position for the next 13 weeks

You can keep on top of the numbers using your accounting system, which will tell you how much you have now. 

But, in order to look forward and forecast your financial position for the future, you will need another tool in your arsenal. This tool is what finance buffs call a 13-week rolling cash flow forecast. 

Essentially, it’s a spreadsheet that helps you forecast what your cash balance will look like on a weekly basis for the next three months. Its purpose is to quickly show you what business cash flow “gaps” you may have in your business and how you should respond accordingly. Here is a template for what that looks like.

Doing a weekly cash flow forecast will help inform the following:

• When is my cash flow expected to dip?
• How do I close the cash flow gap? 
• What options are available to me, such as a line of credit or financing, to fund any cash flow gaps? 
• What does our business look like with customers paying us a bit late?

If you don’t have a cash flow forecast, work with your accountant or bookkeeper to get one together. It’s a nifty tool that you can use for the rest of your business journey.

Cash flow tactics

Once you have a lay of the land with your business cash flow forecast, the next step is to understand how you can improve your cash flow position.

There are three ways we can do this:

1. Get more cash in the door from customers.
2. Defer liabilities.
3. Consider short-term finance.

Get more cash in

Collecting more cash from your customers is the first and most important step. Generate an accounts receivables report from your accounting system and review all your debtors. If there are any laggards, pick up the phone and chase them. 

If they are a small business, chances are they may be experiencing some cash flow challenges as you. In this case, consider offering a payment plan. Get them to commit to a small, affordable, weekly repayment via direct debit to help with their cash flow. Every little bit helps.

Defer liabilities

Deferring liabilities is a neat trick to help you get through those leaner months where cash is tight. It won’t mean eradicating your debts — it’s simply spreading payment of liabilities over a period.

Liabilities include anything you owe to suppliers. If you have strong relationships with your suppliers, consider asking them to extend their terms during this period. Don’t be too greedy however, because remember that your accounts payable are their accounts receivable.

Another tip is, if you spend a significant amount of money with Facebook or Google for advertising, consider switching your payment method from direct debit to monthly invoicing. This will give you an additional 30 days to square them up.

When it comes to creditors, the biggest one will most likely be the ATO. The ATO has been considerate to small businesses as a result of the pandemic, so we are finding them very reasonable and fair when negotiating payment arrangements.

Once your bookkeeper has lodged December 20 BAS, consider requesting a payment arrangement for the liability. The term you need will depend on what your cash flow forecast looks like, but it’s best to be conservative in this scenario.

Short-term financing

If you have exhausted all the options above, you may need to resort to short-term financing to plug the cash-flow gap.

Start by assessing your current credit facilities and limits. These could include:

• Current Bank overdraft.
• AMEX and business credit cards.
• Trade finance.

Review each of the facilities and understand the drawdown limit. Chances are you haven’t reviewed these in a while, so there may be an opportunity to increase the limits from what they are.

For example, a client of SBO had a $40,000 facility on their business AMEX which hadn’t been reviewed in several years. 

A simple email to AMEX got that limit extended to $100,000 in less than a week. That’s an extra $60,000 of interest-free finance to help cover the cash flow gap — a saving grace for this business.

If you’ve exhausted all your current facilities, you may need to consider online lenders. Personally, I am not a huge advocate for some online lenders because their effective interest rates can be as high as 40%. However, you may not have a choice.

In summary, the ‘hangover’ period is a challenging time for most small businesses.

Getting financial control and visibility with a cash flow forecast can help you intimately understand any gaps and build a plan to navigate through.