The Christmas cash flow gap: what will your business look like in January?

By Stuart Kendall

Christmas has a funny effect on business cash flow. For some businesses, December is one of the busiest months of the year - work is being finished, invoices are going out and everyone is trying to get things wrapped up before the break. Then January arrives.

Customers are still away. Accounts departments are running on skeleton staff. New work can take a little while to get moving again.

Meanwhile, wages still need to be paid. Staff may be taking annual leave. Rent, loan repayments, software subscriptions and other fixed costs haven't gone anywhere and an invoice you were counting on being paid on 23 December suddenly doesn't arrive until mid-January and there’s nothing you can do about it.

That's the Christmas cash flow gap.

We think October is a very good time to start thinking about it.

Don't just forecast to Christmas. Forecast through it.

It's easy to look at what's in the bank today, what you expect to invoice before Christmas and assume everything is looking healthy. The more useful question is:

"What will our cash position look like at the end of January?"

Start there and work backwards. Look at what you realistically expect to receive in December and January, then map that against what needs to go out.

Think about:

●      Wages and super

●      Annual leave and any applicable leave loading

●      Tax obligations

●      Rent and loan repayments

●      Suppliers

●      Insurance

●      Software and subscriptions

●      Planned purchases

●      Your own drawings or wages

●      Any other significant expenses due over the period.

Then be realistic about January revenue.

If your customers typically take a few weeks to return to normal after Christmas, build that into your forecast rather than assuming January will behave like any other month.

The aim isn't to predict every dollar perfectly, it's to see a potential gap while there's still time to do something about it.

Don't let December invoices become January problems

If you're relying on an invoice being paid before Christmas, don't wait until 20 December to find out whether that's likely to happen.

Some things to check off:

●      Invoice completed work promptly.

●      Check in your invoicing software that it’s been ‘viewed’.

●      Check that all information required by the customer has been included.

If you have overdue accounts now, October and November are a much better time to start following them up than the week everyone closes for Christmas.

This is also worth thinking about beyond Christmas - if late payments regularly put pressure on the business, review your payment terms and invoicing process. Depending on your business - deposits, staged payments, shorter payment terms or invoicing as soon as work is completed may create a much healthier cash flow cycle throughout the year.

Know what the Christmas break will cost

If you employ people, the shutdown period deserves its own line in your cash flow planning:

●      Who is taking annual leave?

●      How much leave has accrued?

●      Does leave loading apply?

●      Will anyone continue working through the period?

●      Are there public holidays that affect payroll?

●      What will your first pay run of January look like?

If you're planning a Christmas/New Year shutdown, check the rules that apply to your employees. Awards and enterprise agreements can contain specific provisions about whether employees can be directed to take annual leave during a shutdown and how much notice must be provided. Once you know what the break will cost, factor it into your forecast.

What happens if your biggest December invoice doesn't arrive?

This is a question worth asking before Christmas: "If our largest expected payment arrived four weeks late, could we still comfortably meet our obligations?"

If the answer is no, that's useful information. It doesn't necessarily mean there's a problem with the business, but it does show you where the risk sits and where you should focus.

You may need to follow that invoice more closely, build a larger cash reserve, reconsider the timing of discretionary spending or talk to your adviser about other options.

A healthy business shouldn't become vulnerable because one customer pays late, and if one invoice regularly determines whether you can comfortably meet payroll or other commitments, that may be a bigger conversation about customer concentration and working capital.

Think about the first few weeks back, too

January isn't only about surviving the break. There's also the restart.

●      How quickly does your business normally return to full revenue?

●      Do you need to purchase stock or materials before new income arrives?

●      Will you have a large supplier bill waiting?

●      Are there tax or super obligations approaching?

●      Will staff return at different times?

For some businesses, February is when cash flow actually gets tight because that's when December and January finally catch up with them.

So don't stop your forecast at 31 January either. Look far enough ahead to see when the business genuinely returns to its normal rhythm.

October is the time to make sure you’re ready

The Christmas cash flow squeeze isn't necessarily caused by a lack of work - often, it's simply a timing problem. Money comes in later than expected while expenses keep moving on schedule.

That's why looking at this now is so valuable.

You still have time to follow up debtors, adjust spending, understand leave costs and build some breathing room before December arrives.

So before the end-of-year rush begins, take a look at your cash flow forecast and ask one simple question: "If January is slower than we hope and a key customer pays us late, are we still comfortable?"

We can help you understand what the Christmas and New Years period is likely to look like for your business from a cashflow perspective, allowing you to implement some strategies before the squeeze arrives.

A number of our clients have had success in this space by utilising the cashflow manager tool in Xero. If this is something that you want our assistance with, let us know and we can discuss implementation.

Get in touch with us to book a free, no-obligation initial consultation.

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Stuart Kendall is a Director and Business Adviser at blueprint4, a small to medium business accounting and advisory firm based in Warragul.

blueprint4 works with business owners across Gippsland and Melbourne's South East.