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PKF Australia

Accountants and Business Advisers

The Christmas Cash Flow Crunch

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Daniel Smith

Director

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The Christmas Cash Flow Crunch

Whilst the Christmas festive period can be the busiest and most profitable season of the year for some industries, ironically it also puts a massive financial strain on many businesses which roll into the new year.

The most common mistake we see is the lack of planning leading up to a known quiet period, which results in our clients having to implement last minute, unideal, “firefighting” strategies to manage overdue and upcoming creditor payments.

Here are some strategies we recommend businesses implement to help them avoid a “Christmas Cash Flow Crunch”:

1. Implementing a Rolling Three-Way Forecast

Before explaining this strategy, it is important to define it:

  • A Three-Way Forecast is a dynamic forecast that encompasses the Profit and Loss Statement (income and expenses), Cash Flow Statement and the Balance sheet (Assets and Liabilities). By looking at all three elements of a company’s financial position, it allows the business to gain a holistic understanding of their current and future financial position.
  • A Rolling Forecast simply means it is not a static forecast with a fixed timeframe, but a forecast that is regularly updated and provides a reliable indication of the company’s future financial position.

This type of forecasting is important as it allows businesses to get a reliable insight into future performance and in turn plan for seasonal and financial impacts.

This process involves not only regularly updating Rolling Three-Way Forecasts, but also taking a step back from day-to-day operations and reviewing the forecast with your business advisers and/or management staff, to mitigate any cash flow or financial performance issues before they ever arise.

2. Having Effective Debtor and Creditor Policies

The most common mistake is not having Debtor and Creditor policies documented and regularly reviewed. Having policies and procedures in place, allows for prudent oversight and effective management of cash flow, as it ensures clarity for everyone involved in the process. 

Whilst this strategy is extremely different depending on the industry you are operating in; the overarching concepts are essentially the same. Here are some recommendations we give our clients throughout the invoicing process:

  • Before: Negotiating appropriate payment terms; providing accurate quotes and requesting upfront deposits or payment plans for customers with poor payment history.
  • During: Ensuring invoices are sent out as soon as possible; invoices are accurate/correct and that clients receive the invoices.
  • After: Sending regular automated Statements of Account and contacting customers as soon as the debt falls overdue.

3. Seeking Additional Financing

Whilst finance facilities can be an effective way of managing seasonal impacts on cash flow it is important to note that the approval process can take several weeks. Bear in mind that lending institutions will generally require up to date management financials, which therefore extends the approval process further, should you not have up to date bookkeeping records. We recommend clients review their financing facilities with their financial advisers several months prior to requiring them. Here are some of the more popular financing facilities that are used to overcome short-term cash flow issues.

  • Debtor Financing – This is a form of financing where a business’ Accounts Receivable ledger is funded. It is particularly useful for businesses experiencing issues with customers not paying invoices on time.
  • Overdraft / Temporary Overdraft Facility – This facility is primarily used in the event of an emergency cash flow deficit.
  • Company Credit Cards – Assist in delaying minor overhead payments.

The importance of planning is highlighted by a famous quote from Abraham Lincoln, “Give me six hours to chop down a tree and I will spend the first four hours sharpening the axe”. The common theme amongst all these strategies is the importance of cash flow planning. Implementing an effective cash flow plan, allows businesses to identify issues in advance, mitigate the identified issues and have appropriate financing facilities in place, should all else fail.


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