No surprises this Christmas

November 2013

Retailers are gearing up for the approaching busy Christmas period however many other businesses typically slow down - or shut down - over the Festive period. That can often translate to a cash flow crunch early in the New Year, when many businesses return to normal trading only to find they don't have the cash to meet their usual obligations. 

Traditionally February is one of the worst cash flow months for business and that typically comes down to outstanding debtors from Christmas time. Managing the holiday season well can make a big difference to how your business is positioned in the New Year.  

So how can you best position your business to avoid a post-Christmas cash crunch? Here are our top tips:

Get your invoices out and follow up promptly on outstanding debtors
The closer we get to Christmas the harder it gets to collect payment from outstanding invoices, but if you leave these debtors till January, you are likely to find it's impossible to collect cash. Whether it's because they have shut down for the holiday period or are on skeleton staff over the long summer holidays, you may find that it will be some time before you're paid. 

Don't forget your creditors
Even if you're fortunate enough to have stock running off the shelves over Christmas, don't forget that the holiday season also brings bigger costs. Not all of the cash will stay in your business as you'll need to pay your creditors and staff. It's important to ensure you plan to have enough cash in for February and March, which is when many businesses hit a cash flow wall. 

Manage staff costs
Staffing is a major cost for many businesses and can run as high as 70% of expenditure. It's essential that you review your staff rosters and only have the staff available who are absolutely necessary to manage anticipated trading levels. 

Encourage staff to take their holidays over this period so that they are available during peak trading periods. You can't assume that it will be obvious to everyone who works in the business that a slow trading period equals less staff required. Many team members will have an expectation of continuity if you have not said anything.  

A business can enforce a temporary close down and require staff to take leave during a down time, but you cannot force them to take unpaid leave. Now's the time to check whether your staff have enough leave to cover a forced closedown over the Christmas period. If they don't, you need to ensure your leave policy allows for team members to go into negative leave.

Keep your cash liquid rather than tied up in unnecessary stock
Even very large businesses often have too much cash tied up in inventory.  Keep your cash as liquid as possible and don't tie it up unnecessarily in stock. Drive down stock in the lead up to Christmas and only order the bare minimum to meet your requirements over the holiday season. But don't forget to plan for your New Year requirements to ensure that your suppliers have the stock you need available when you need it in the New Year.    The number one reason why most Australian's buy online is because they could not find what they needed when they visited a retailer or supplier. 

Discount only if you have to 
Discounting as become something of a mainstay around the Christmas period and while it may seem a good opportunity to boost sales, there are pitfalls to be aware of, particularly with sacrificing margins in the effort to boost sales.  

For example, a business with a 30% gross profit margin that offers a 25% discount requires a 500% increase in sales volume just to maintain the same position. In almost all cases that's just not going to happen. The result generally is the business will be trading below its break-even point and generating losses.  Most SMEs simply can't survive for any period of time trading at a loss.  You have to compete but think very carefully about what it is you are offering the market. 

Review, plan and talk to the bank
Even though we're just five weeks from Christmas, it will pay to do a cash flow forecast to determine if the business will struggle during the Christmas holiday break as well as in January. 

If you realise that revenue could be tighter than expected, talk to your bank about the possibility of getting a short-term overdraft extension in place. While we stress that it should be a last resort to actually use the overdraft, banks are likely to be more receptive if they can see you've got a plan in place to trade through a slower cash flow period. 

If you're not sure about your cash flow position ahead of the Christmas period, now is the time to look at the potential impact on your post-Christmas trading. Contact us on 02 9957 4033 to book an appointment.

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Last updated November 2013. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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