The holiday season is always a stressful time for small business owners. Many are concerned with how they will have the funds to get through the first quarter of the year as the nation slows down over Christmas and summer.
Last January, finance company Scottish Pacific saw a spike in enquiries from business owners hoping to borrow funds to see them through the cash flow slump. Scottish Pacific senior executive Wayne Smith suggests if small business owners want to avoid getting caught out by cashflow problems over January it’s time to start asking questions now.
Shoring up capital with finance is one way that businesses can prepare for any rough patches but Smith says getting your house in order now will save heartache in the coming months.
“The sooner SMEs get the right funding in place, the more they’ll be able to focus on the business of maximising their opportunities.”
Smith suggests business owners as these four questions
1. How does trading look pre-Christmas?
“If you’re going to be busier, are you carrying enough stock, and do you have enough working capital to get your hands on extra stock at short notice?” Mr Smith said.
“Do you need any more staff on a short-term basis? Will you be paying existing staff for extra hours? If the answer to these questions is yes, can your current cash flow sustain these extra demands?”
2. How much do you need to cope with a festive season shutdown?
“Business owners should be looking at their trading hours across the Christmas and New Year period. Many may shut down but have to pay wages and leave-loading in advance of their sales invoices being paid. It’s important to work out in November how much extra you might need, and ensure you can cover this,” Smith said.
3. Will January payments come through in time to cover outgoings?
Businesses may not feel the pinch in January because wages will likely have been paid up front for part of the month and payments for invoices raised in November will hopefully start coming in, he said.
“If you know your customers are slow payers and you might struggle to see invoices paid in January, you need to put systems in place ahead of time to cover this contingency, because you’ll still have bills to pay.”
4. February BAS is looming – can you cope?
Each year by February, thousands of small businesses become stretched to the limit in the post-Christmas/ New Year period.
Smith said now is the right time for business owners to be considering the full wages they’ll have to pay in February, and whether they’ll be light on cash coming in from sales invoices raised in December and January due to likely shutdown.
“I’d recommend that if businesses don’t already have cash flow forecasting in place, they should definitely move to implement this discipline for that crucial post-Christmas period.
“Even a basic cashflow forecast will clearly show you whether you will need additional funding. If your existing sources can’t cover you, do you have any other alternatives? Have you thought about other ways you could fund the business in that period?”
He said Scottish Pacific SME Growth Index research showed more than eight in 10 business owners dip into their own pockets to fund growth, but there are ways to fund growth without side-tracking personal funds.
Potential SME action steps to help with cash flow
SME Growth Index September 2019 findings discovered small businesses reporting significantly worse cash flow has doubled since early 2018. No matter whether they are growing, declining or stable, small business owners have flagged that their cash flow woes are increasing.
With this in minds Smith said a few actions that could help business owners improve their cash flow are:
- Get in line early: make sure you invoice when work is done, rather than wait until month’s end.
- Make the most of the quiet period: get your business to-do list in order and a great start is to read the Business Funding Guide created by ASBFEO and Scottish Pacific and talk to your accountant, broker or other trusted adviser about finding the right funding for your situation.
- Consider using invoice finance to access extra funding. Invoice finance, also known as debtor finance or invoice factoring, offers businesses a line of credit linked to and secured by outstanding accounts receivable. This form of funding can be accessed on a come and go basis or as a long-term working capital solution.
“Invoice finance provides a stand-alone facility that can sit alongside your other business borrowings (for example overdrafts, term loans, and asset finance). There are no capital repayment requirements and the facility helps you grow your business and increase purchasing power through improved cash flow.”