How SMEs can avoid post-Christmas cashflow blues

The nightmare before Christmas for many SMEs is the thought of how they’ll pay their BAS at the end of February. The lead-up to Christmas can be incredibly busy, then things go quiet for up to two months – and while no invoices are being paid in the meantime there are wages, suppliers and other bills that must be honoured. Then, after a period of leaner cashflow, a BAS payment is due.

We traditionally see a spike in enquiries in November as business owners look at the books and realise they will need assistance as the post-Christmas quarter can be a challenging time, and the traditional seasonal dip in cashflow makes it more difficult to fund growth and to meet outstanding liabilities on time.

With the ATO’s 2015-16 annual report showing small businesses owed almost $13.9 billion in collectible tax debt, we encourage SMEs to avoid running up a tax debt due to Christmas working-capital issues.

It’s not uncommon for high-growth-businesses to end up with an ATO debt because they don’t have the funding or cashflow support. Often this comes from a lack of awareness of the many small-business funding options available, including debtor finance, that don’t require property as security.

Here are our six tips to boost post-Christmas cashflow.

  1. Speed up your collections cycle. Improving debtor days – the average time taken by customers to pay invoices – can really make a difference to cashflow. An example: a business turning over $110 million and with an average debtor days cycle of 60 days could receive a cashflow boost of more than $135,000 by cutting debtor days down to 55 days. Simple ways to reduce debtor days include making sure invoices show all the relevant information required by the customer to make payment, sending timely payment reminders and putting in place a reminder call program.
  2. Take deposits on large orders. This way you are not having to outlay for large production costs up front.
  3. Closely monitor stock. Having too much stock on the floor, especially if certain lines aren’t selling, depletes your cash reserves. If a line is a “turkey”, don’t hesitate to sell it off cheaply to turn it in to cash.
  4. Negotiate with your suppliers for longer payment terms. This helps you keep cash in your business.
  5. Consider discounts for early payment. While you might take a small hit with the discounting, the sweet trade off could be a reduction in your borrowing costs.
  6. It may be cost-effective to re-structure your borrowings. Look at all working capital options – there have never been more viable funding options for SMEs, so it pays to look beyond the traditional bank.

You can remove the reliance on real estate security by taking out facilities such as debtor and trade finance. With debtor finance, instead of the business owner taking on additional debt the funder offers an advance on money that is already owed to the business.

Trade finance is a working capital tool available to importers – it provides capital to bridge the gap between paying your overseas suppliers upfront and getting paid months later by your customers.

Wayne Smith, Head of Debtor Finance, Scottish Pacific

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