By Frank Knight, CEO of Debtsource
It’s been seen that time and time again the start of a new year can be a testing time for many South African businesses. January is almost always the leanest month for most companies as they cope with poor cash flow and increased outstanding debtors. Those reliant on timely client payments to boost their cash flow may be faced with account departments shutting down over December, causing payments to be even later than ever before.
The reality is that some businesses may have generated strong sales in November and December but they are not paid until February or March. That plays havoc with cash flow and means that financially, you’re starting the new year on the back foot.
No matter how carefully you run your company, industries outside of retail often face cash flow problems at the start of the year which could be avoided with careful preparation. Here are some insights on the best practices to survive the seasonal slumps.
Cash flow reserves
Creating a cash flow forecast and understanding seasonality are important preparation tactics. You also need to stay on top of market conditions, monitor clients and set aside a cash cushion in case of an emergency. Take advantage of peak periods in order to drive as many sales as possible, which should have a positive effect on cash flow. The more prepared you are, the less stressful it’s going to be when problems with collections arise.
Prudent debtors management
Although seasonal threats may make it easier to opt for debtor quantity over quality, it is important to understand who your clients are and if they are reliable. Focus on quality debtors throughout the year. The more high quality and reliable the client, the more chance you have of settling your debts on time and increasing your cash flow. Be aware that there are likely to be cash flow disruptions over the holiday period and prioritise collections on the most important invoices. Remember that a company’s liquidity is largely dependent on the quality of its debtors.
Applying for favorable credit terms – such as longer payment terms – with your trade partners or suppliers could combat changes in business payments throughout December. Extending your business’ payment terms to accommodate business closures, does not only give you more time to collect your money from your debtors, it also increases supplier satisfaction and strengthens your cash flow in the New Year.
Consistent credit management systems including invoicing quickly and effective credit control, should be in place throughout the year to ensure both you and your clients are always on the same page. If communication is always transparent, there is more chance that both vendors and lenders will be accommodating to each other’s needs no matter what the time of year.
Businesses that take a proactive approach to managing their cash flow and adhering strictly to their collections policies can take some of the stress out of the festive season and look forward to a cash-positive start to the New Year.
For more information on credit management techniques that will help you to safeguard your business and maximise your cash flow, visit www.debtsource.co.za or follow them on Twitter @debtsource.