The countdown to Christmas is now on and we're in the midst of the headlong rush to get everything done and capitalise on any remaining opportunities before the Christmas lull.
Busy period or not Christmas causes a period of dislocation and volatility for most businesses. This dislocation and volatility means that it is not business as usual and for many businesses, it is the change that causes the problem.
Most business owners cope well with consistent trading conditions. Trading and business conditions are predictable and the solutions you have used in the past should work. Change the environment though and normal does not necessarily work.
Here are some things to watch out for:
If business activity spikes over the Christmas period and you sell goods then there is a temptation to increase stock levels. That makes sense as long as you don't go too far. Too much stock post the Christmas period and you will either be carrying product that is out of season or you will have too much cash tied up in trading stock. Try to work with suppliers who can supply on short notice. Better still, see if some of your suppliers will supply you on consignment where you only pay them once the stock is sold. It might be better to miss a few sales than carry a trading stock headache into the New Year.
Managing your trading stock is not just about managing cost. A recent study by the Australian Centre for Retail Studies at Monash University found that 61% of the people who went to a traditional retail store but then bought online did so because the retailer didn't stock what they needed.
Avoid discounting in peak season. The sale signs are already up and this will continue in the run up to Christmas. The danger is the 'me too' strategy: If everyone else is discounting then it sounds like a good idea. Know your profit margins and how much you can afford to discount. Discount your margin away over the peak trading season and you will not have any profit buffer to carry you into the New Year.
A business with a 30% gross profit margin that offers a 25% discount (certainly nothing unusual about that in today's market) needs a 500% increase in sales volume just to maintain the same position – and in almost all cases that's just not going to happen. The result generally is that the business is trading below its break even point and generating losses. So, think carefully about your strategy and what you can sustain.
Costs tend to go up over this time of the year. More staff, leave costs, downtime from non-trading days as well as increased promotion costs all mean that costs will push upwards. Keep an eye on them. It's great to get into the Christmas spirit as long as you don't end up with a New Year hangover.
The New Year will lead you into a quieter trading period and a tighter cash flow period. The March quarter tends to be the toughest cash flow quarter of the year. You will need some cash buffer going into the New Year. Don't over commit yourself in the run up to year end and end up in trouble in the New Year.
If you work with account customers, start your debtor follow up now. If your customers are under any cash flow pressures, the Christmas period will only increase that pressure. The creditors who chase hard and early will get paid first. Don't be the last supplier on the list – the basket may be empty by then.
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Last updated November 2012. 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.
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.