Managing cash flow over the festive season

The December to February period when many businesses slow down is normally the most challenging time for many small businesses and their cash flow. You can quickly find yourself at a loose end if you don’t keep an eye on your cash position.

Here are some cash flow tips to help you manage this difficult period.

Cash flow forecast

It’s important to have a cash flow forecast during this time to manage your cash position by tracking your cash in-flows and out-flows. Your cash in-flows include your sales and debtors, plus any loan or credit facilities you may be able to draw down on. Your cash out-flows include expenses, payroll, capital expenditure, past liabilities, like tax, and any loan repayments you need to meet.

I recommend doing cash flow reports for the period from December to 28 February 2012 and updating the figures on a weekly basis. This will help you to identify any potential shortfalls early and give you enough time to take action.

Tax obligations

Ensure tax obligations are included in your cash flow forecast. There is plenty to consider when it comes to managing your tax obligations over the festive season, even more so since in the last six months the ATO has become even more stringent concerning tax debt.

Most businesses would have lodged their September business activity statements (BAS) in late October. I advised many businesses at this time to ensure this debt was paid in full. If you didn’t you should have contacted the ATO to put in place a payment arrangement.

The first tax obligation in 2012 will be a quarterly BAS return, which is due on 28 February (for most businesses). Take this into account because February is only the first month when business and cash flow starts to return to normal levels. So you need to have cash flow set aside now to meet this obligation in February before things start ramping up again in March. Remember you also need to cover GST, PAYG on payroll and income tax instalments during this period.

If you have a prior payment arrangement with the ATO keep in mind you will have to meet your quarterly BAS liability in full as per the terms of the ATO’s payment arrangements. If you miss this payment, the ATO will come down hard on you.

Keep on top of debtors

The festive period is a particularly tricky to when it comes to collecting payment from clients. Nearly everyone’s feeling the same pressure from reduced cash flow so it’s important to not let this area slide.

Strategies to implement include:

• Revisit your payment terms for debtors and ensure they are working well for the business. If you find your debtors are not adhering to these terms, perhaps they need reminding.
• The New Year is also a good time to revise your payment terms. If your terms are currently at 30 days and you are suffering from a delay in cash flow, consider shortening them to 14 days.
• Also review your debtors to see if you should be servicing clients if they are not paying their bills. You should be focused on investing your time on paying customers.

It’s great to be able to say you made $200,000 profit. But if that’s just an accruals profit-includes profit made on unpaid bills - and you’ve had to write off $150,000 in unpaid billings, then you’ve really only made a cash profit of $50,000.

So by understanding your cash flow and cash profit, you can better understand your business and its bottom line profitability.

Maintain good relations with creditors

Your relationship with creditors is another critical area that requires planning over the festive season. The time you pay your suppliers has to be planned carefully as you don’t want to find yourself in a situation where you’ve paid all your suppliers but then struggle to collect money from your clients.

At the same time you want to ensure you maintain a solid and positive relationship with suppliers as their support contributes to the success of your business.

Some strategies to help you achieve this include:

• Talking to your suppliers about the possibility of extending your payment terms, even if this is only over this two month period.
• If suppliers offer discount for early payment, consider taking advantage of as any money saved can boost your cash flow.
  
  
  

This article is intended to provide general information only, and is not to be regarded as legal or financial advice. The content is based on current facts, circumstances, and assumptions, and its accuracy may be affected by changes in laws, regulations, or market conditions.  Accordingly, neither Azure Group Pty Ltd nor any member or employee of Azure Group or associated entities, undertakes responsibility arising in any way whatsoever to any persons in respect of this alert or any error or omissions herein, arising through negligence or otherwise howsoever caused. Readers are advised to consult with qualified professionals for advice specific to their situation before taking any action.