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 A leading debt agency has warned small business owners that a Christmas cash crisis is on the way and he reckons you’re better off being realistic than leaving your head in the sand with your rear end primed for a New Year kicking.

Roger Mendelson CEO of Prushka, a debt recovery agency, explains why Christmas can burn cash.

Cash burning season

“There is generally a heavy cash burden on small businesses, with Christmas pays, compounded by the holiday leave, and reduced output and billings/orders in the week leading up to Christmas”, says Mendelson.

“Those businesses running tight before Christmas are more likely to ‘fall over’ in February/March than in any other time of the year.”

Mendelson says those selling mainly to business customers can be in more trouble.

“For businesses in the business-to-business sector, the situation is grim,” he says. “Their customers will usually be in the same situation deferring payments as much as possible in order to build sufficient funds to tide them over the Christmas hurdle.”  

Know your ebbs and flows

The time left to head off a cash crunch before Christmas could be tight but your New Year’s resolution has to be to get into cash planning. An enormous mistake many in business make concerns the difference between cash flow and profitability.

Profitability measures the cash leftover after all payments are met, while cash flow is an ongoing measure of the movement of cash in and out of a business over a week, month, quarter or financial year.

A cash flow forecast that takes in the ups and downs of the flow of cash in a business is absolutely essential to avoid the embarrassment of a bounced cheque or even worse, insolvency.

Cash flow should be constantly monitored so you can arrange for lending facilities if a deficit period turns up. If you aren’t comfortable doing this yourself seek an external expert to put a system in place.

The nature of the beast

The whole nature of business is designed to create a cash crisis.

Let’s face it, you buy stock before you sell goods to other businesses or the public. If you sell goods, then you must first buy stock. There’s wages, contractors, telephone, rent etc, which all have to be paid for before you open the letterbox on a cheque.

Play with your customers

The starting point for a cash flow strategy is to know how your customers pay up. You need to compare this to how you pay your bills. The smarties often suggest that you bill early and pay late to give you a cash flow edge.

Also you need to work out the best credit deals with your suppliers, just as your customers play it with you. The more credit transactions you allow and the longer your customers take to pay you, the greater the impact on your cash flow.

Keep it simple

The best trick is to make it as easy as possible for your customers to pay you and in this modern age you should be happy to be paid by Bpay, credit card by phone — 24 hours a day, seven days a week if possible and even Postbillpay in person at any Australia Post outlet, nationwide.

Basically be as electronic as you can be so automatic transfers at predetermined times can be completed.

Use discipline

Have a late payers strategy. This should involve a courteous but firm call after a bill is overdue. While no one wants to lose a customer, if their late paying is stressing your business then act professionally and take on the issue. You should also consider using a debt collecting agency or even a factoring service, which buys bills off you at a discount and then collects the money from your client.

Deliver the dollars

Once you have done everything to get your money in as quick as possible, then look at the outflows. Better management might mean paying annual bills monthly. It could also mean negotiating discounts by promising to give all work to one supplier or even by paying by cash.

All too often businesses put too much time into selling things and collecting customers and then neglect the very important task of money collection.

Words of wisdom

When I first went into business 22 years ago I heard some words of wisdom that I really didn’t comprehend until I started to grow my business and brought on staff who wanted money every fortnight.

Until then my business was always high on revenue and low on costs but my partner and I did put in a lot of hours.

The words were: “You can last a long time not being profitable but it is a lot harder to survive a negative cash flow.”

Of course, making a loss is not to be encouraged but burning cash is the fastest road to a business dead end. And I emphasise the word — dead!

Remember if you can’t do it internally, then do it externally and also remember, anything worth doing is worth doing for money!

Work on your business, not in it. To learn how, book a complimentary business assessment today with a Switzer Business Coach.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Friday, December 18, 2009

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