Christmas Cashflow Crunch – How SMEs Can Overcome Them

cash flow financing

As the festive season approaches, small and medium enterprises are heading into a potentially precarious financial period when normal business trading conditions no longer prevail for a couple of months. 

Most at risk for these businesses is their cash flows because for companies not in the retail, hospitality, or accommodation industries, sales are slower than usual, and expenses remain the same or increase. Also, many customers effectively shut down from the middle of December into early January, and non-payment of invoices before then means they are only likely to be paid in January, or possibly, February. 

If companies haven’t planned for these eventualities, revenues and expenditure could go seriously awry, resulting in a cash crunch for those companies that don’t have access to an emergency financial buffer or alternative finance to tide them over.

To avoid potential cash flow catastrophe over the Christmas period, business owners need to plan carefully to secure early payment of invoices before the festive season takes hold. Otherwise, they will need to make alternative plans to fill the cash-flow gap because they are only likely to be paid in the January pay cycle after normal business conditions resume.

What Steps Should Businesses Take to Navigate this Potentially Tricky Trading Period?

Owners need to ensure the invoicing process is even more tightly managed than usual so that they can foresee potential problems coming and plan for these. However, the months leading up to the Christmas season are usually hectic. Thus it can be challenging to find the time to concentrate on administration, paperwork, and invoicing while also filling orders and making sure customers are happy. 

The best thing for the owner to do is to designate a staff resource to managing the debtor’s book at least a month, preferably two, before the festive season comes around. That staff member should ensure all the invoices are submitted to the customers as early as possible, ideally following up with a phone call to the person paying the invoice.

It can help to alert the customer to the fact that Christmas is a difficult period for small and medium enterprises, given the disruption in the ordinary course of business. Understanding that, they are likely to take payment of the invoice on-time more seriously. It is crucial that the person responsible for ensuring invoices are paid keep tracks of outstanding debts, sending reminders before the due date, on the due date, and a few days after that.

If you are concerned the customer may get irritated by being persistently reminded to pay the invoice, you can always in centivise them to pay the invoices early by offering them a discount for early payment. But you will need to alert them to this option well ahead of time if you want to get paid before the holiday period.

If there are warning signs that invoice payments are running late and could put the company cash flows at risk, it is worthwhile having prearranged access to alternative financing, such as invoice finance. Also known as debtor financing, this easily accessible short-term funding support would provide welcome relief by ensuring the business remains in the black until the New Year. 

An invoice finance company generally offers two invoice financing options. Companies can either opt for invoice discounting, which usually unlocks between 80% to 95% of the invoice amount due immediately, with the remainder, less the invoice financier’s commission, available after full payment. The company would still be responsible for pursuing payment of the invoice. However, if the company opts for invoice factoring, the invoice finance company would take over the outstanding invoices and collect them on the companies behalf – enabling all the employees in the company to focus on business operations and revenue-generating activities instead of following up on invoice payments. With careful thought and planning, owners of small and medium enterprises can avoid the financial pitfalls that are so common at Christmas and be free to participate in the festivities along with everyone else fully.

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