Avoid the Christmas cash flow hangover

The Christmas and new year period underscores the retail/wholesale divide for businesses, and brings opportunities and headaches for both sectors.

Traditionally, as consumers engage with the Christmas spending spirit, retailers cheer. Conversely, for wholesalers and other business-to-business firms, closing down is often the wisest option, as transacting dries up and a holiday mentality kicks in.

Cash flow management is fundamental to business success and the smart solution for dealing with the multiple variables within a budget blueprint is long-term planning.

Chartered accountant David Henderson, CEO of ROCG Australasia and creator of CashMAX Forecaster (an online dashboard that helps businesses plan, set strategies and manage budgets), argues that viewing Christmas as a unique period is contrary to the reality and works against the effective operation of businesses.

“Christmas is just a different period in the cycle, which translates as businesses needing to plan the rest of the year to cover this time,” he says. Adopting a big-picture perspective and planning for the overall year, based on the distinct idiosyncrasies of the industry in which the business is operating, is the only way to avoid cash flow traps, he suggests.

Retailers experience their peak season over Christmas, “often making 50 per cent of their turnover during December and January”, Henderson says. “That means they’ve been slogging it out for the rest of the year and then suddenly they get a lot of cash.

“There are two things they have to be really clear about,” he stresses. “If someone has money in their pocket, they’re tempted to spend it and not think of other commitments. However, they need to note that much of that cash isn’t theirs, because it’s GST, so that portion has to be put aside. Also, during that period, retailers often ramp up their staffing, so there’s superannuation to consider.”

Many shopping centres open from 8.00am to midnight in the lead-up to Christmas, which means employing workers for an extra six to seven hours a day at overtime rates and potentially doubling staffing costs. If sales don’t happen this can cause a large dent in cash flow.

Without staff you can’t take advantage of the increased sales. However, supplementing regular staff with casuals can mean your workforce is less committed to your business’ performance. “If it’s a lovely, sunny day, casuals may choose not to turn up,” Henderson says. He advises businesses to balance their workforce by spreading their existing permanent staff across the day so they’re not tied to casuals.

Also, understand what the money coming in is for, Henderson suggests, to avoid pitfalls. “The trick is to take it out of the transaction account and put it into a separate area – ideally against the mortgage or a debt – so there’s no risk of spending it.”

Wholesalers are at the other end of the spectrum. “Their cash-collection function is disrupted for several weeks,” Henderson explains. “They need to look at how much cash they can collect before 15 December so they don’t have a whole lot of debtors out there owing them money. At the same time, they have to start getting prepared for clients wanting to reorder stock.”

Henderson has identified seven ways for wholesale and other business-to-business operations to avoid cash flow traps over the Christmas period:

  1. Invoice and chase. Ask for accounts to be settled up-front. Don’t be afraid to make a quick phone call to remind a client about an overdue invoice. A phone call is often more efficient than an email and is less inclined to be disregarded.
  2. Review supplier agreements. If some suppliers have fallen off your Christmas card list, use the new year to renegotiate better terms and agreements and shop around.
  3. Be wary of giving credit. Always run a credit check. Christmas is a time when new customers want to spend up big.
  4. Let the banks give a gift. Accepting credit card payments means the issuing financial institution, rather than your business, carries the risk.
  5. Tax and super don’t do Christmas holidays. Don’t overlook your GST and superannuation commitments. Don’t forget that increased sales attract extra GST, so plan ahead.
  6. Stash some cash. A pile of cash in a separate, high-interest-bearing account could make for a happy Santa.
  7. Make a new year’s resolution, such as “My financial reporting will be based on reality and I will monitor my cash flow daily.”

“Ultimately, it really doesn’t matter what period we’re talking about,” Henderson says. “Every business needs to understand what makes it work and what needs to be taken on board to guarantee a steady cash flow.”

Words: Jill Fraser

The articles represent the views of the authors and not necessarily that of the Bank. You should seek independent professional advice before acting on any matters set out in the articles.