Are you ready for the festive season cash flow squeeze?

As many seasoned business owners understand, the lead-up to the festive season involves a ramp-up in sales activity and turnover. While the bumper trade in the lead-up to the festive season can set a business up for a great year - as a considerable proportion of the annual revenue for a retail business is generally secured at this time - it’s often the January and February squeeze that causes financial pain.

The New Year slowdown

When sales are forecast to increase dramatically, many businesses anticipate the demand and stock up (literally) by ordering extra inventory and ensuring they have additional staff to manage the coming rush. The additional inventory and staff costs from November and December typically must be paid for by the end of January, but this drain can coincide with a slow sales month. Furthermore, the usual statutory payment due dates continue to fall early in the new year.

Unless the cash flow impact of the ramp-up leading into the festive season is well managed, some business owners can find themselves squeezed in the new year once as the creditor payments become due.

Bridging the gap

Many good businesses exposed to the cyclicality of the festive season's boom and slowdown are well organised and will often speak to their working capital provider to ensure the working capital facilities are maximised at this time of year. Having the right mix of working capital facilities such as overdrafts, trade, and debtor finance facilities can mean the difference between a positive start to the second half of the financial year or one where the financial hangover means disgruntled suppliers, Australian Tax Office (ATO) payment plans or the imposition of more difficult trading terms by creditors.

So, what does success look like for business owners?

Our experts recommend speaking to your working capital facility provider ahead of the January tightness to ensure your working capital facilities are a good fit for your sales cycle. This will help you to be well placed to manage the difficult January and February months. Being proactive always reflects well on you and your business by your bank. However, the opposite - having bounced payments or overdrawn facilities - often saddles you with more difficult conversations with the lender and negatively affects your risk scoring, leading to higher margins.

The alternative is a knee-jerk reaction to find the quickest unsecured lender who can pump some short-term funds into your account. These lenders can perhaps solve an immediate problem, but the costs of funds are often substantially higher than those of your normal working capital lender, and if repayment isn’t forthcoming quickly, escalating legal action can follow.

Where possible, ensure you start your process now and get in touch with your working capital provider before the festive season so you’re well prepared. Ensure this discussion is on your to-do list, alongside managing your staff's annual leave requests, public holiday closure periods and arranging the staff Christmas party.

Get in touch with our debt advisory team if you need any assistance with your working capital needs. BDO is accredited with all major lenders and can assist you in ensuring the right conversations take place to set you up for success.