How SMEs can avoid the post-Christmas cash flow blues

The typically slow post-Christmas quarter can be a challenging time for SMEs, with cash flow difficulties a serious concern for many business owners. Here, Wayne Smith offers eight tips to counter your post-Christmas cash flow blues.

The typically slow post-Christmas quarter can be a challenging time for SMEs, with cash flow difficulties a serious concern for many business owners. Here, Wayne Smith offers eight tips to counter your post-Christmas cash flow blues. 

With small businesses already owing approximately $10.6 billion to the tax office according to Australian Taxation Office’s 2012-13 annual report, cash flow at this time of year is a real concern for SMEs. But there are ways to avoid the angst that comes with the approach of the end-of-February BAS deadline.

“It's not uncommon for successful businesses, experiencing high growth, to run up ATO debt,” Smith said. “Many SMEs may not have raised invoices from December 20 to mid-January, meaning cash receipts into their bank accounts will be seasonally low around the end of February and into early March. This comes on top of the additional expense incurred in paying for staff's Christmas leave loading. Even strong, well established businesses can find themselves tight for cash to meet their February Business Activity Statement.”

Smith said SMEs currently struggling with cash flow issues can look at the following tips for alleviating them.

1. Speed up your collections cycle: Improving debtor days – the average time taken by customers to pay invoices – can have a dramatic impact on cash flow. For example, a business turning over $10 million, reducing debtor days from 60 to 55 days achieves a cash inflow in excess of $135,000. Often something as simple as improving paperwork (making sure invoices show all the relevant information required by the customer to make payment), sending timely reminders and putting in place a disciplined reminder call program) will help reduce debtor days.

2. Take deposits on large orders: So that you are not having to outlay for large production costs up front.

3. Look at all working capital options: Including debtor finance. With debtor finance, instead of taking on additional debt, an advance is offered on money that is already owed to the business. Debtor finance is for businesses that sell to other businesses on standard trade credit terms. It is particularly useful for labour intensive businesses where wages have to be met well ahead of payment receipts.

4. Closely monitor stock: To maintain optimum levels (dependent on the turnover of the different lines), having too much stock on the floor means you may have unnecessarily depleted your cash reserves. If you have stock that is in danger of becoming obsolete, don’t be afraid to sell it off cheaply to turn it in to cash.

5. Negotiate with your suppliers: For longer payment terms so you keep cash in your business.

6. Consider offering your clients
discounts for early payment: The trade off being a potential reduction in your borrowing costs.

7. Look at whether it is cost-effective to re-structure your borrowings: You can remove the reliance on real estate security by taking out facilities such as debtor finance.

8. Trade finance: Another working capital tool available to importers, trade finance provides capital to bridge the gap between paying your suppliers and getting paid by your customers. 

Smith said over the past 25 years debtor finance has become a mainstream funding option for SMEs in Australia. According to Smith, there are currently more than 4,500 Australian SMEs, with combined annual revenues of $65 billion, using debtor finance.

Wayne Smith is head of product development at Scottish Pacific.

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