Four questions SMEs need to ask to avoid Christmas/New Year cashflow headaches

Last January, we saw a spike in funding enquiries, with business owners concerned about having the right cashflow to see them through the first quarter of the new year.

October through to December is typically the strongest quarter for funding enquiries, as business owners look to shore up their working capital to see them through this tricky period.

The sooner SMEs get the right funding in place, the more they’ll be able to focus on the business of maximising their opportunities. Now is the time for business owners to ask themselves these four key questions:

How does trading look pre-Christmas?

If you’re going to be busier, are you carrying enough stock, and do you have enough working capital to get your hands on extra stock at short notice? Do you need any more staff on a short-term basis? Will you be paying existing staff for extra hours? If the answer to these questions is yes, can your current cashflow sustain these extra demands?

How much do you need to cope with a festive season shutdown?

Business owners should be looking at their trading hours across the Christmas and New Year period. Many may shut down but have to pay wages and leave-loading in advance of their sales invoices being paid. It’s important to work out in November how much extra you might need, and ensure you can cover this.

Will January payments come through in time to cover outgoings?

Businesses may not feel the pinch in January because wages will likely have been paid upfront for part of the month and payments for invoices raised in November will hopefully start coming in.

If you know your customers are slow payers and you might struggle to see invoices paid in January, you need to put systems in place ahead of time to cover this contingency, because you’ll still have bills to pay.

February BAS is looming – can you cope?

Each year by February, thousands of small businesses become stretched to the limit in the post-Christmas/ New Year period. Now is the right time for business owners to be considering the full wages they’ll have to pay in February, and whether they’ll be light on cash coming in from sales invoices raised in December and January due to likely shutdown.

If businesses don’t already have cashflow forecasting in place, they should definitely move to implement this discipline for that crucial post-Christmas period.

Potential SME action steps to help with cashflow

SME Growth Index September 2019 findings were that those SMEs reporting significantly worse cashflow has doubled since early 2018. There are a few actions that could help business owners improve their cashflow are:

  • Get in line early: make sure you invoice when work is done, rather than wait until month’s end.
  • Make the most of the quiet period: get your business to-do list in order by reading the Business Funding Guide and talk to your accountant, broker or other trusted adviser about finding the right funding for your situation.
  • Consider using invoice finance to access extra funding. Invoice finance, also known as debtor finance or invoice factoring, offers businesses a line of credit linked to and secured by outstanding accounts receivable. This form of funding can be accessed on a come and go basis or as a long-term working capital solution.

Invoice finance provides a stand-alone facility that can sit alongside your other business borrowings (for example overdrafts, term loans, and asset finance). There are no capital repayment requirements and the facility helps you grow your business and increase purchasing power through improved cashflow.

Wayne Smith, Head of Debtor Finance, Scottish Pacific

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