SMEs should prepare for the annual Christmas slowdown now, or you could be left chasing payments until well into the new year. Here’s how to avoid the Christmas cash flow crunch.
The festive season can be the most profitable time of the entire year for most business owners, ironically it can also be the most financially crippling time of year.
Nearly three-quarters of business owners, at 72.5 per cent, are actually being kept awake at night worrying about cash flow in the lead-up to Christmas, according to recent Scottish Pacific research.
The bottom line is that if your payment terms are 30 days and you don’t get your invoices out now, you could still be chasing debtors well into the new year. Combine this with the obligatory January cash flow drop off and you could find yourself feeling the financial pinch that takes months to recover.
Don’t forget there’s also a high degree of volatility in financial markets in light of Donald Trump’s win in US presidential election, according to the November Business Research and Insights review by the National Australia Bank. NAB also reports the economy is rapidly losing momentum, with the number of firms expecting to cut staff the same as those planning to hire.
This predicted economic slowdown means that if you don’t get invoices paid now, it could be far harder to extract funds from debtors down the track.
Meanwhile, banks have largely moved out of the small business lending space, meaning that financial support can be difficult to find when you need it the most.
And while the true cost of carrying overdue payments is rarely calculated and seldom understood within a business, when calculated, they can be significantly higher than first thought.
Harvard Business Review has calculated the costs of carrying receivables in your business, whereby 60 days outstanding adds 9 per cent to every dollar owed, and 27 per cent for 120 days overdue.
This takes into account not only the time cost of money, but other elements like administrating the cost, the costs to your business financing, bad debt costs and of course, the lost opportunities for your business to grow by not having the receivable in your bank account already.
Investing a little time now to put in place robust collection procedures will help you rest easier during the holiday period with these tips:
The first step is to make sure you’ve assessed your cash flow, and that you’ve made arrangements with your financial institution if you think you’ll need additional financial support to survive the Christmas period.
You should also move away from invoicing customers in bulk at the end of the month and start sending invoices straight away. Offer discounts on accounts which are paid a few days before Christmas.
Also, stop being your customers’ bank. If a debtor knows they can get away without paying you for 60 to 90 days, why would they pay you any sooner? Be up front about your trading terms, and consider charging a fee for late payments.
The key to reigning in your debtors is monitoring all aspects of your debtors list, have a policy for managing difficult debtors in a consistent way, and act before the situation gets out of hand.
Invest in online automated invoice reminder tools that can do the chasing for you. These systems automatically send out reminder notices to clients who haven’t paid within your terms, saving you time, stress and awkward conversations.
Some forward planning now will ensure you reap the financial rewards over the festive season and that you start the new year on the right foot.
Damian Arena is the managing director of debtor automation software platform IODM