Prepare your business cash flow for the New Year

For many businesses there is no more challenging time in the year than the festive season for the management of cash flow. Being a key trading period, demands on cash are high but collections can also be problematic as payables staff take annual leave. Add to this, the traditional sales slow down in the first few months of the new year and business tax due in late February, and it is a period of heightened risk which if left unmanaged can cause cash flow issues that can affect trading performance when demand does return in the new year.

Knowing the potential problems is important to managing them, so here are the five most common problems encountered which can cause blowouts in payables and receivables and increase financing costs.

  • Slow debt turn – Slowing payments from customers can have serious issues on a business’ ability to grow sales and profitability, and may lead to breakdowns in supplier relationships.
  • Overtrading risks – Many businesses, faced with a glut of new orders can expose themselves to the risk of overtrading, where a business undertakes a level of trading which cannot be sustained by the required level of finance and ultimately leads to a business running out of working capital.
  • Lending restrictions – It is well documented that access to funding from traditional funding sources remains difficult at present, and further restrictions at inopportune times can impact on trading or mean valuable opportunities may be lost.
  • Inventory Management – Significant amounts of much-needed cash can be locked up in unsold inventories
    Debtor Insolvency risk – Being a period of cash flow strain for many businesses, debtor insolvencies can cause serious cash flow issues and the risk of bad debt.

To help your business prepare and minimise any issues here is a quick 10 point checklist:

  1. Invoice early and often and consider requesting deposits where possible
  2. Deal with potential late payers now and take the time to review credit reports or consider credit insurance
  3. Investigate solutions to improve receivables management in the quiet period
  4. Use the Christmas period as a way of improving your customer and supplier relationships to put your business on a firmer footing for the new year
  5. Clear overstocks and inventories now and invest in accuracy of sales forecasts
  6. Prioritise new work – what investments can be delayed until cash flows are stronger?
  7. Consider the efficacy of offering early settlement discounts to prompt early payment
  8. Examine outgoings and shut down if necessary to minimise cost
  9. Consider if working capital finance is required to provide cash flow support
  10. Produce cash flow forecasts to assist with identifying precise periods of high cash usage

Check out our article How to Create a Cash Flow Forecast where we show you how to analyse the financial health of your business.