managing cashflow during decemberWith the festive season around the corner, spirits are lifting and we are all looking forward to a well-deserved break with friends and family. For most small business owners however, the festive season is usually associated with some serious cash flow issues. Follow these 6 easy steps and you might just start the new year with a positive bank balance.

  1. In business, cashflow forms the heartbeat of your organization, regardless of the size or nature thereof. For all of us SMME’s out there, we know this to be even more-true for our own businesses. The usual reasons for these are two fold. We very likely find ourselves still in the start-up or an aggressive growth phase, usually in the first three to five years. This phase in business can usually be associated with that of the first years of an infant. These phases are extremely capital intensive which means that instead of building up reserves for the lean months, all your profit is reinvested to sustain the unbelievable appetite for cashflow your business currently has. Without the proper nutrition, your infant won’t develop and be as healthy as it should. Similarly starving your business from cashflow in these first few years might be detrimental to the survival thereof.
  2. As we are still re-investing all our profits, we do not have the necessary reserves in place that would buffer us against these typical risks that you would otherwise find in older, more established entities.

Typically Decembers are a really tough month as far as cash flow goes. Despite the fact that most businesses close down early in the month, other factors to consider are:

  1. Most corporate companies have a December year end which means that their budgets are being reviewed and if you haven’t gotten that purchase order yet, chances are that you will only receive it well into the new-year.
  2. Depending on your Human Resource policies your company might have to pay your employee bonuses or incentives in December.
  3. We are all part of the same food chain and circulate exactly the same currency between a vast number of market players. Most businesses manage their cashflow risk for December on a very conservative basis, sometimes holding onto payments or new orders into the new year. Regardless of your risk strategy, a few of your customers hold back their payments in December or some suppliers rush you for payment, the picture can turn very grim for your own cashflow forecast.

A few easy solutions that might help you ease the burden over the festive season, are:

  1. Compounded interest is certainly one of the wonders of the world. Although this might be a longer term vision, it is certainly one that the sooner you start the greater the rewards. Decide on a fixed monthly amount that you can place on a high yield short term deposit. The idea is to save towards an amount that would at least cover 3 month’s worth of fixed expenditure. In time it will give you the buffer you need to take the edge of any cash flow difficulties you might experience, be it December or any other month of the year. Indicate this amount as an expense on your monthly budget and exercise the discipline to make the monthly payments. The most difficult part is to take the first step.
  2. Strategically think about your larger operational or capital expenditure. If it is not an absolute necessity, try and roll it over into the new-year. Every rand that is unspent or committed is a rand less that you have to potentially supplement from somewhere else.
  3. Adapt your HR policy to a performance based instead of a guaranteed incentive system. It will take a lot of pressure of the organization if you do away with a guaranteed 13th cheque and replace it with a performance based bonus. Implement quarterly performance reviews to use as the benchmark for these, possible performance based bonuses. Instead of paying out all your bonuses in December, adapt your policies and incentivize your employees in the month that they celebrate their birthdays. That way you spread an otherwise large payment in December, evenly into a more sustainable lower payment throughout the year.
  4. Most of our clients has either a December or a February year end, which means that their second provisional tax payment is either due on or before 31 December or 28 February of the next year. As a standard we advise that our clients always try and manage a larger 1st Provisional Tax payment than what their actual liability is. That way, should anything unforeseen happen, a portion of your liability has already been absorbed by means of an inflated 1st payment.
  5. Depending on your VAT period, you might also have to pay your VAT liability for the October/November period before end December. On this topic it is important to remember that your VAT liability is payable on the invoice date and not the date you receive payment. Scrutinize your end of November billings. If there are any substantial invoices that you know for a fact won’t settle their bill during December, send out the invoice dated 1 December instead of 30 November. By doing so you have extended your collection period by another two months, as you now only have to pay the VAT portion on the invoice before end of Feb and not December as before.
  6. As a last alternative, put into place an overdraft facility that would act as the buffer you need, in lieu of having the available cash in your own account. Should you have to dip into this reserve fund, have a plan ready in which you will repay the capital so that it is replenished and available for the next difficult period.
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