How bad Christmas cash flow can lead to catastrophe

Roger Mendelson

The Christmas period is one of the most dangerous times in the lifecycle of a small business.

It’s a time when the financial hardship of a business is felt the most and for many SMEs, can lead to their collapse early in the New Year.

A recent report from the Australian Securities and Investment Commission revealed small businesses are the most common to suffer insolvency, with 80 per cent of businesses that closed having less than $100,000 in assets and 79 per cent having fewer than 20 employees.

The period from late February to early March is what I call “graveyard month” because typically it’s the most likely time a business will collapse. Most of these insolvencies are usually the result of cash flow drying up over the Christmas period, which has a flow-on effect for later in the year.

This is because most of your business-to-business clients will start to slow down in mid-December and are closed for operation until late January. If they have overdue accounts with you, or you are relying on them to make purchases before the end of the year, it is unlikely you’ll see it.

Then, at the start of the New Year, they hold back on placing new orders while they assess the damage of their own Christmas slow down and will try to defer paying any invoices.

Your consumer clients will also be feeling the pinch after Christmas having spent their holiday pay and then some, followed by the usual New Year bills such as back-to-school expenses.

Further, with your revenue drying up during this time and extra expenses to be paid, such as staff holiday pay and leave loading, this period can really put a strain on your finances.

While banks have provided support in years past, with low growth expected to continue next year, most are restricting their SME lending.

Most businesses don’t adequately budget for this cash flow trough, and while banks have provided support in years past, with low growth expected to continue next year, most are restricting their SME lending.

If you haven’t already started preparing, here are some simple tips to survive the Christmas crunch: Assess your accounts and contact those with outstanding debts; evaluate your stock levels and plan a New Year sale of old stock; defer any orders or payments until after Christmas where possible; if you do need to place orders, negotiate to pay within 90 days so as to pay after Christmas; review your list of overdue accounts and refer any older than 90 days to a collection agency now; contact the creditors who you owe money to and ask for deferred trading terms – for example, if you owe them $15,000, try to negotiate to pay $5000 per month; if you are able to provide some real estate security, talk to your bank as soon as possible about setting up a temporary line of credit; if not, look into other means of accessing short-term cash such, as an increased credit card limit, because while this is very expensive finance, it is better to have the draw-down capacity available, as opposed to being sued by an unfriendly supplier.

Apart from the above, take the time to enjoy your holidays. You will come back refreshed and ready to deal with the post-Christmas crunch.

Roger Mendelson

Roger Mendelson is CEO of Prushka Fast Debt Recovery and principal of Mendelsons National Debt Collection Lawyers. Prushka acts for in excess of 53,000 small to medium size businesses across Australia and operates on the basis of no recovery – no charge. Roger is also author of The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival, both published by New Holland Publishers.