Key points:
- The festive season can disrupt business finances due to increased spending and shutdowns.
- Cut non-essential expenses, avoid long-term contracts, and diversify suppliers.
- Engage with banks early, build cash reserves, and maintain strong customer relationships.
The festive season, often a period of increased personal spending and celebration, can also pose significant cash flow challenges for businesses. Particularly those that experience a shutdown during this period (together with their customers). While service delivery and sales might take a break, businesses still need to balance operational expenses such as payroll, insurance, rent, and debt repayments. So how can businesses manage cash flow in this financially challenging period? There are a few steps leaders can take to help manage the cash flow crunch over the festive season.
Tips for effectively managing cash flow
1. Monitor discretionary spending
Reviewing and adjusting discretionary spending is crucial. According to a survey by QuickBooks, 61% of small business owners reported they regularly struggle with cash flow issues. Free up vital cash by identifying non-essential expenses and postponing them. Consider negotiating better terms with suppliers, reducing inventory levels or delaying non-urgent purchases.
2. Avoid long-term agreements
Committing to long-term agreements with suppliers or other stakeholders can limit flexibility. Instead, opt for short-term or renewable agreements where possible, allowing you to adapt your spending based on current cash flow conditions. You will need to balance a possible rise in price as part of this equation, often paying a little more for flexibility.
3. Expand your supplier network
Diversifying your supplier base can mitigate risk and enhance your bargaining power. A report by YouGov identified that 75% of responding businesses faced challenges in trying to address common supply chain risks including third-party cybersecurity, delivery bottlenecks, geopolitical impacts and economic inflation. Expanding your supplier network could lead to better deals, quicker delivery, and more flexible payment options.
4. Engage with financial institutions early
If you find yourself in need of financial support, proactive engagement with banks or financiers is essential. Discuss your cash flow needs early to explore product options, extended repayment periods or more flexible repayment schedules (for example, interest only).
5. Build and manage cash reserves
Having cash reserves is vital for managing business expenses effectively and it can impact business confidence and strategic outlook too. In fact, according to Pitcher Partners’ latest Business Radar report, the top four factors negatively impacting leaders’ future business confidence all relate to cost and cash flow pressures: changing interest rates, inflation and increased labour and operating costs. So having appropriate reserves to manage expenses drives an impact beyond financial viability.
But future-proofing finances takes planning. Set aside a portion of profits in a readily accessible account and consider seeking advice to diversify and invest in liquid assets like bonds or shares to generate additional income.
6. Maintain strong customer relationships
Your customers are your most important asset and your main source of cash flow. You should maintain a good relationship with your customers and provide them with quality products or services, timely delivery and an excellent service experience. Managing customer relationships also means managing accounts receivable and payments effectively. Encourage prompt payments by offering early payment discounts or implementing penalties for late payments. Leveraging online payment platforms can also facilitate faster transactions. Where possible, consider bringing forward monthly invoices which would ordinarily be issued late December to mid-December to improve pre-holiday receipts.
With the increase in ATO debt recovery activity and tightening of lending markets, it is also a good time to consider whether your business is protected from customer failure. Consider reviewing terms of engagement/supply and whether current security arrangements are in place, adequate and validly registered on the Personal Property Securities Register (as applicable).
What to do next?
Effective cash flow management during the festive season is crucial. When building out your cash flow management strategy remember to ask:
- Is there a clear and realistic cash flow forecast for the next few months?
- Are there enough cash reserves to cover expenses and contingencies?
- If not, is there access to adequate and affordable financing options?
- Does the business have good relationships with suppliers and customers?
- Does the business have a loyal customer base and systems for prompt payments?
Businesses that can answer “yes” to these questions are well-prepared to manage cash flow during the festive season. If not, consider taking proactive steps and seek professional advice if needed. Remember, effective cash flow management is crucial to sustaining and growing a business, both during the festive season and well into the future.
