The Christmas period for small businesses seems to lead to cash flow problems. From there, things can go from bad to worse, seeing a rise in insolvencies in the New Year, typically in February. To avoid these cash flow shortages, small businesses should start to plan for the cash flow crunch now.
The Christmas shut down period sees the normal cycle of cash collection cease. For small businesses, many invoices are not chased for payment resulting in reduced cash coming in, which can have knock on effects on the business further disrupting cash flow.
The following tips could help you combat the cash flow crunch.
1) Securing working capital & ensuring receiving the maximum turnover
Cash flow problems are always an issue. As a small business, your focus must be on securing your working capital and ensuring you are achieving the maximum turnover.
2) You also need to be wary of any customer concentration risk
This is a situation where an individual customer equates to 30%, 40% or even 50% of total revenue. Concentrating revenue with one particular account is especially dangerous. Christmas time is unfortunately the most likely period for a large account to miss a payment cycle.
3) The key to combating this period is mid to long-term budget preparation
A small or start up business in particular, because of its low turnover is initially susceptible to severe cash flow problems. The ease with which start-ups can fall into a cash flow crisis sees the need for them to be ever more vigilant and ever more prepared.
Most small businesses and start-ups are living hand to mouth, not looking further than the next week or next paid invoice. Try to avoid this by preparing a plan to combat any cash flow problems.
4) Preparing a rolling 13-week cash flow
A good way of predicting and reacting to trading and social trends is to prepare a rolling 13-week cash flow. As you are constantly forecasting three months ahead, you should be better equipped to handle the peaks and troughs, and become more adept at recognizing any warning signs.
Many of the businesses that fail during their first two years of operation do so out of lack of planning. As many are living hand to mouth, they don’t recognize the trends and thus do not have enough of a buffer to secure themselves during the low periods.
Once you have prepared your rolling 13-week cash flow, small businesses that can identify the lack of funds and will need to secure additional working capital immediately, whilst also considering the need to injecting extra funds into the business through the selling of non-vital assets.
5) Clear communication of your payment expectation with clients
A further handy tip is to clearly communicate your trading terms with clients prior to the undertaking of a job, particularly well before the Christmas trading period.