Christmas this year is looking similar to last – uncertain – and with January a traditionally tight spot for small businesses around the country, now is the time to get prepared. This means monitoring cash flow and managing working capital.
“Unless you are an ice cream seller near a beach or a removalist firm, which traditionally have their busiest trading over Christmas and into the New Year, it is important to start preparing now to cover costs and maintain strong cash flows when business is traditionally quiet,” says Gary Green, Director of Bibby Financial Services.
“Like last year, we are entering the festive season with retail figures remaining weak, a string of major insolvencies, a slight rise in unemployment and tightening of credit and bank overdrafts.”
Of course the fundamentals of caring for cash flow should be ticked off as always, including bolstering processes and procedures, invoicing early and often, and regularly running credit checks. But Green says it’s also be a good time to take another look at the funding tools available to you.
One of the most cash flow effective of those is debtor financing.
“Debtor finance is a versatile funding arrangement, suiting a wide range of businesses and industry sectors from small start-ups to established listed small cap companies, from manufacturers and wholesalers to business service providers.” Green advises.
If you’re unsure, debtor finance provides a flexible line of credit based on outstanding invoices. You will usually pay an interest rate on the borrowed balance and in return the bank will provide access up to 90% of the value of your outstanding invoices.
“Although it can be slightly more expensive than other funding facilities on a straight comparison of interest rates, this comparison ignores the often significant benefits of strong cash flow to the business - from more streamlined operations, less reliance on discounts for prompt payment, reduced accounts receivable cost and the ability to take advantage of opportunities more quickly,” Green explains.
And if you think rapid growth and stellar sales are enough to ignore conservative cash flow planning, think again.
“In the rush to grow, it is often the fundamental business practices - such as getting sound credit control procedures in place - that are left at the bottom of the 'to do' list,” Green warns, “ And yet growing companies are the most hungry for cash flow funding.”
“A key risk for these businesses is ‘overtrading’, which results in blowouts in payables and receivables and increased financing costs that squeeze margins – which can be fatal.”
In these situations, growing businesses might need to reduce sales or look into ways to fund working capital to better align sales with production. Because over-zealous expansion can be the death of any business if cash flow isn’t accounted for.
So spend the time and get prepared for this festive season to ensure you and your business can have a happy new year.