Start-ups warned to prepare for Christmas cashflow squeeze

Start-ups are being urged to remain vigilant in managing their working capital to avoid a cashflow crash in the new year as they stare down the barrel of a lukewarm Christmas trading period.

According to Gary Green, director of Bibby Financial Services Australia, start-ups should brace themselves for tough trading conditions this Christmas.

“Like last year, we are entering the festive season with retail figures remaining weak, a string of major insolvencies… and tightening of credit and bank overdrafts,” Green says.

According to Green, the average small business now waits almost twice the standard 30 days for payment of invoices.

Meanwhile, businesses insolvencies remain relatively high amid a tax office crackdown on tax arrears, and a general tightening of trade credit from suppliers.

“Unless you are an ice cream seller near a beach or a removalist firm… it is important to start preparing now to cover costs and maintain strong cashflows,” Green says.

“When the nation goes on Christmas holidays, accounts staff are harder to contact, and many businesses are on skeleton staff, so anticipating cash shortages is critical.”

“Without adequate planning now, the business may have to deal with serious issues next year such as paying that first tax bill in the new year after a period of lean cashflow.”

Green says young, fast-growing businesses are particularly at risk.

“In the rush to grow, it is often the fundamental business practices – such as getting sound credit control procedures in place – that are left to the bottom of the ‘to do’ list,” he says.

“And yet growing companies are the most hungry for cashflow funding.”

According to Green, a key risk for young businesses is overtrading, which leads to blowouts in payables and receivables, and increases financing costs that squeeze margins, which can be fatal.

“In such situations, businesses may need to reduce sales or investigate ways to fund working capital better to align sales with production,” Green says.

To ensure a reliable cashflow, businesses are encouraged to bolster processes and procedures, invoice early and often, and run credit checks periodically.

“Cashflow is king, and so monitoring cashflow in the current environment should be a high priority,” Green says.

“Should your businesses be facing any immediate or anticipated cashflow shortage, having a closer look at debtor finance could be a good idea.”

“Just in case the environment becomes even more challenging, now is a good time to prepare.”

“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.”

“Retail, construction and IT-related services, however, are not suited to debtor finance.”