Setting ambitious growth targets for the new year can ensure you hit the ground running, but the effort could be wasted without the cash flow to fund them.

The coming Christmas and New Year break is the perfect time for businesses to assess this year’s results and set priorities and growth targets for 2016.

A new year always offers re-energised SMEs the chance to identify new growth opportunities, invest in expansion or even adjust business direction.

That is, if businesses have the cash flow available to fund these efforts.

Data and anecdotal experience indicates businesses can expect trade payments to slow down during and after the holidays. In 2015, although invoices were paid at the historically fast average rate of 50.4 days in the March quarter, this was still a much longer wait for payment than in the final quarter of 2014.

The seasonal contraction in cash flow can leave unprepared businesses struggling to meet fixed costs, and leave New Year growth plans forgotten.

If your cash flow takes a holiday too, it can make for a bad start to the year.

Cash flow and Christmas 

For retail businesses, Christmas and New Year often represents a healthy cash flow injection. For other industries, it can be a very cash poor time of year.

Businesses report that holidays taken by staff and customers can slow down the payment collection process, as reminders come late and calls are missed. Some customers will even take the opportunity to shut their doors completely, leaving them unavailable to take calls or make payments until later in January.

Though cash flow may be slower, fixed expenses like wages, rent and interest payments will remain. In addition, supplier invoices issued ahead of Christmas will often fall due in January, leaving businesses facing a cash flow shortfall.

Businesses can take control of their cash flow ahead of the seasonal lull, by being mindful of strategies that can minimise the Christmas cash flow crunch.

Plan to profit: Reviewing the cash flow experience of previous years and planning ahead using a detailed cash flow forecast can ensure your business is prepared for the size and duration of the slowdown. Account for variables like sales, wages, payments to suppliers and your upcoming tax liabilities.

Prioritise collections: Issuing invoices promptly in the lead-up to Christmas can shave time off payment turnarounds. Back this up with systems and processes that bring discipline to collections, by enshrining timely payment reminders, overdue notices, and proactive follow-up calls for overdue payments.

Monitor your stock: Christmas is a difficult time to control inventory levels, but cash locked up in unsold stock can often be put to better use. Consider selling off older stock cheaply to free up the cash you require to meet ongoing expenses.

Test your terms: Now is a good time to tighten up your payment terms or offer Christmas early payment discounts to improve seasonal cash flow. For large orders ahead of Christmas, negotiate full or part payment in advance. Also, take the opportunity to negotiate extended credit terms with your suppliers.

Build a backup: Make sure you have cash flow to survive the season by putting away some cash reserves into a high interest savings account, ensuring your existing finance facilities have the flexibility to deal with any unexpected fluctuations, or consult with a professional debtor finance provider.

Keep your capital working

Debtor finance provides certainty for businesses wanting to growth-charge the first few months of 2016 and achieve their business New Year’s resolutions.

Rather than having to wait longer than usual for invoice payments, professional debtor finance providers are able to advance up to 85 per cent of the value of invoices immediately, and do not usually require property as security.

As cash flow slows down, businesses can strategically manage unpaid invoices and fixed expenses using debtor finance to smooth out any seasonal bumps.

The holidays are always a great time for a well-earned break, but it’s even better when you know your working capital is waiting for you when you return.

About the author:

This article was written by Wayne Thomason, Chairman of the Debtor and Invoice Finance Association of Australia.