The cash collection cycle usually slows down at Christmas. Photo: Fiona Morris
CHRISTMAS is a boon for retailers, but it's also the time when small businesses are most likely to become insolvent.
Businesses in sectors such as services or manufacturing suffer a decrease in production and sales, with many shutting down altogether for a couple of weeks. At the same time, they're still paying wages to staff who are on holiday, as well as other fixed costs, such as rent and loan repayments.
''Generally there's a slowdown in the cash collection cycle,'' says Quentin Olde, partner in charge at accounting practice Taylor Woodings.
''So there's a general slowing down of the flow of funds through small businesses and at the same time their costs keep coming in.''
The result can be that come February, many businesses don't have the cash to meet their obligations, so may become insolvent and potentially collapse.
Despite the difficulties, there are several things small businesses can do to improve their cash flow.
Make a plan
The first thing to do is a cash flow forecast to see if the business is likely to struggle around Christmas time, says Olde. ''Have a detailed cash flow forecast plan to get you through that period, and where there are going to be shortfalls in that cash flow, look at ways to deal with them.''
Talk to the bank
It's worth approaching the bank about getting a short-term overdraft extension, but the earlier a business does this the more receptive the bank is likely to be. While banks have tightened their lending criteria in recent years, Olde says they could be receptive to such a request. ''They're comfortable with it so long as they can see the business has thought through and planned for it and that it is just a temporary issue and it's not the beginning of a longer-term or systemic problem in the business,'' he says.
Get invoices out
Roger Mendelson, chief executive of Prushka Fast Debt Recovery, says the difficult post-Christmas period is often made worse for consumer-focused businesses because many people load up their credit cards at Christmas, only to be hit with back-to-school expenses in late January.
So businesses need to ensure they get their cash coming in as quickly as they can. The first thing to do is to get their accounts in order and send out invoices in good time before Christmas, says Mr Mendelson. Otherwise they're likely to be ignored until well into the new year.
Also, try doing interim billing, if possible. For instance, a plumber who's done some work on a house could bill for the work he's done up until Christmas.
Follow up invoices
Likewise, businesses should follow up invoices that have already been sent out and not paid. ''You need to get really focused on getting on the phone and getting the cash in,'' says Mr Mendelson. Try offering a discount to customers who can pay straight away. ''Being on the phone is certainly something a lot of SMEs are not too comfortable with, but it is certainly the best way to get the cash in quickly.''
Talk to suppliers
If a business is expecting a cash flow crunch, its owners can try to negotiate with suppliers to hold off paying them until mid or even late February, to buy a bit of breathing space. ''You'll often find that if you place the order the supplier is very keen to get the order and he'll be happy with that,'' says Mr Mendelson. ''But if you don't incorporate that provision, you'll be getting pressure from a source you'd prefer not to …''
Use a debt collector
It's worth engaging a debt collector once a bill is more than 60 days outstanding. ''Most of our clients make a real mistake of sending in debts far too late, and there's a clear correlation between age of the debt and its collectability,'' says Mr Mendelson. ''If a debt is six months old when it comes to us, that customer has really got it out of mind …''
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