through the silly season

Cash flow is always a challenge for business; in particular for businesses in their first few years of operation and especially during the annual silly season. However, the good news is that there is any number of significant areas where savings can be made and some semblance of operational peace of mind experienced.

Holiday pay, especially the statutory holidays, is always a significant cost-gobbler, as are the usual costs associated with the festive period: client gifts, cards, staff gifts and party, along with additional security and overtime payments for longer opening hours. So how do these costs measure against the benefit for the business? Are all these outgoings really necessary?

This is also a period for enforcing your terms with clients. The softer you are, the more likely they will see you as a very cheap and easy finance facility – a moneylender without the margins.

Stock levels are also worth keeping a sharp eye on because, after all, stock can be thought of as cash sitting on the shelves, and any prudent business ought to regard it as such in determining what constitutes a comfortable level to maintain.

This is also a period for getting invoices out early. Since most businesses aren’t staffed until the second week of January, the likelihood of clients paying invoices sent after Christmas by the 20th of the following month is greatly reduced.

Tax deadlines, of course, also shift. The IRD allows the payment of GST normally due on December 28 to be held over until January 15. But watch out: if your operation is on a monthly GST cycle, the next due date is 28 January.

There are other areas that can chew through cash, but which are more easily managed. The purchases of new assets, for instance, should probably be held over until the cash returns to normal levels.

The usual cash outgoings for overheads may be affected by the summer holidays as well. Ensure you and your suppliers have the same understanding. Push them for discounts or options for delaying payment.
Looking ahead is crucial to preparing for and managing your cash. I often work with clients to prepare or assist in developing cash-flow forecasting models. These need not be overly complex or time consuming – a simple spreadsheet can even suffice – especially if you’re working with a skilled adviser.

What I suggest is a minimum 90-day rolling forecast based on the likely timing and amounts of cash coming into the business from customers and, of course, the relevant costs during the same period. For service-based business at least, staff costs are usually a known quantity. Overheads are usually predictable too.

The trick is to compare the forecast with past experience to ensure your business has picked up the full spread of income and expenses.

Don’t forget to include the below-the-profit-line items, such as asset purchases, loan draw downs/ repayments, injections or withdrawals of capital by owners. And don’t forget tax obligations.

Once you have this set up, you should adjust the numbers based on your plans for the coming year. This will provide a strong indication of your daily cash position over the coming 90 days. That’s where you can start planning how to deal with any periods where you may be in cash shortfall position, including the period soon upon us.

Here’s a Christmas present you can even give yourself. Taking what we’ve just looked at a step further, you can also project your cash flow out for all of 2010. This will, as well as help keep order through the silly season, help in planning and managing your cash so you can then focus on growing your business and maximising your outcomes in the coming months.

Merry Christmas

Debbie Haddon
www.openside.co.nz