For many, Christmas is a time for winding down, but that can cause serious issues for your small business cash flow. These simple tips will help you prepare and manage your Christmas expenses to make sure your business doesn’t fall short this year.
You don’t need a crystal ball to know ‘Christmas’ and ‘cash flow’ are two things that seldom go hand-in-hand. Domestically the festive period is an expensive one, but in business it can be crippling.
Staff parties are not the only extra costs that are specific to this time of year. Suppliers could shut down completely, meaning important payments might not be processed until the New Year; while other fixed costs (like business rates – payment for which normally run from April to January 1) all tend to undergo some euphemistically termed ‘upward revision’ come January.
The key to beating all of this is to prepare, plan and then forecast your Christmas expenses. Here are some tips to make it through unscathed.
Update your payment terms
Some businesses decide to temporarily increase the upfront deposit customers have to pay (if applicable) to compensate for Christmas payment lags, but the biggest impact firms can make is reviewing invoice payment terms. Half of all UK businesses suffer from late payment of invoices – with 10 per cent of small firms owed more than £10,000 at any one time. To combat this, small business owners should consider also reducing their payment terms from 90 to 60 or even 30 days over Christmas (and perhaps beyond).
Offer discounts for quick payments
Another seasonal approach is offering 5 to 10 per cent discounts to suppliers if they pay more quickly (i.e. before Christmas). That way, you will at least know money is coming in. Meanwhile, those that owe money to their own suppliers (and have their own credit terms – say 30 days) should make full use of them. There’s no benefit paying back interest early if it leaves you short on cash.
In parallel with early payment terms, try establishing late payment procedures (including penalties) to encourage payment to be prompt. At a bare minimum, you should start repeat invoicing (after a set period of time) and follow-up telephoning.
Beware of surprise expenses
Of course, extra anticipation is always needed to plan for typical Christmas costs such as parties and meals out, but other costs can often rise after the holidays. Things like salary increases and staff benefits require small business owners to keep abreast of employment news.
In April 2016, for instance, businesses will need to pay the new National Living Wage (£7.20 per hour – 60p more than it is now). A survey by the Resolution Foundation found 54 per cent of business owners said this alone would materially impact their wage bill. In addition, most micro-businesses will need to forecast for auto-enrolment pension contributions (one per cent of salary) when pension auto-enrolment rollout affects them. With planned increases to pensions and minimum wage costs (pension contributions rise to two per cent from 2017 and three per cent from 2018), cash flow forecasting tools are more important than ever. That way, all inputs can be modelled and forecasts can be made in advance.
Remember, cash flow isn’t just about money in – but also money out, and the best tools itemise the precise dates that funds leave your account. Everything from regular equipment costs, professional fees, utilities, office supplies, debt payments and advertising can be monitored.
At Christmas, it’s likely you’ll be paying staff earlier in the month than normal, so revise payment terms to make sure payments arrive before money goes out. Compiling status reports on the payment history of your clients will also tell you which ones you can rely on most of the time, and what your likely cash flow situation will be come December.
Don’t forget; while Christmas costs may not always leave you feeling festive, they do at least come at a very convenient time of the year – the end. That’s the perfect time for business owners to use the break to take stock of where they are.
To see how cash flow forecasting and reporting can help your business this Christmas, sign up for a free trial with Intuit QuickBooks.
 SME Confidence Tracker Report, August 2015