SMEs warned post-Christmas cashflow crisis will result in a spike in collapses

It’s on again – the annual cashflow crisis that hits the Australian economy just after Christmas.  Tim Lea, managing partner of commercial financial advisory firm Cashstream Financial, says cashflow is notoriously tight through most of January and into early February, following the summer holiday break.  “This time of the year is the worst – nobody pays anybody until mid-February,” he says.  While many payments are affected by the fact that key staff are on holidays, reduced selling periods in December and January puts extra strain on cashflow.  “It’s a double whammy. Nobody’s paying their bills because nobody’s getting paid.”

Typically the fallout from this barren period can be seen in March, when insolvency numbers peak. Last year, there were 1,095 insolvency cases in March, the high-point in what was a tough year for many SMEs.  Lea is expecting a similar story this year. “March is always the worst time of the year because it all just crystalises. “So what can companies do to survive the cash crisis? Lea suggests that planning back in November and December would have been the best strategy, but companies who are struggling now still have a few levers to pull.

Firstly, Lea recommends working the phones and making sure you are at least in the payment queue when the money starts moving again.  Secondly, he suggests targeting your bigger customers and better payers, and even offering them a small discount for prompt payment, just to ensure that you having something coming into the coffers.  Another important strategy is to watch your inventory levels closely and keep spending on new stock to a minimum. “If you don’t need to buy anything, don’t do it,” Lea says.  It might also be a good idea to try to understand the payment cycle of your customers. If they do a “payment run” and settle all invoices at the end of the month, call up and make sure you’re in the queue for January.

If you are worried about the solvency of a particular customer, do your utmost to get paid before the March insolvency spike. “If they don’t pay, consider putting them on stop or threatening to put them on stop,” Lead says.   And finally, if you can avoid paying a bill before mid-February, do it – and use the same excuse that everybody is using.

Lea says financing options such as factoring or invoice financing are an option, but you will need to wait to get these transactions processed. Lea says a financing facility of $250,000 takes two to three weeks to arrange, longer for bigger amounts.  “This time of year is just very uncomfortable for SMEs. It’s essential to chase anything that can be paid and get those paid as quickly as possible.”

Smart Company E-Newsletter Wednesday, 13 January 2010

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