Start-ups warned to act now to avoid post-Christmas cashflow crunch

Start-ups are being urged to start preparing for the Christmas shutdown period now to avoid traditional post-Christmas cashflow shortages that typically lead to a spike in insolvencies in February.

Michael Fingland, managing director of turnaround specialists Vantage Performance, says many businesses fall into a cashflow hole over the Christmas break. As business shuts down over the Christmas period and the normal payment cycle stops, start-ups and small businesses can find it extremely difficult to get their invoices paid – and this year will be no exception

“Cash is going to be tighter than in previous years. So if you’re a recent start-up business, you really need to focus on working capital and making sure you’re getting maximum turnover,” Fingland says.

“SMEs need to be wary of whether they’ve got any customer concentration risk, where one customer might equal 30% or 50% of their revenue.”

“A lot of businesses will lose a major customer [over Christmas] because the major customer goes bust.”

Fingland says start-ups are particularly vulnerable of falling into a cash flow hole because their turnover is less consistent, which is why they need to be even more prepared.

“Having a plan in place that says, if we did lose a major customer what would we do? Have all those initiatives ready to go just in case and work very hard now on trying to win another one or two customers to balance out that risk,” he says.

“Prepare a rolling 13-week cash flow… so you’re constantly forecasting three months out so you can see if there are any flashpoints coming.

“That’s the fundamental mistake most start-ups make – they don’t look beyond a week.”

“Many of the businesses that fail in the first two years fail because they don’t manage those peaks and troughs very well and they don’t have enough buffer to ride any of those shocks.”

Fingland’s other tips to avoid the post-Christmas insolvency spike include:

• Secure additional working capital now.
• Consider selling non-core assets in order to inject proceeds into the business.
• Clearly communicate your payment expectations with customers well before the Christmas period.