Australia

Reporting period: Oct 1, 2018 - Oct 31, 2018

Published: Dec 11, 2018

01.10.2018 - 31.10.2018

Published: Dec 11, 2018

Feast and famine: managing the year-end in small business

The last month of 2018 is upon us, and we know from past years it marks the start of feast and famine for many Australian small businesses. December is a fat month, when Christmas sales fill their coffers. But those coffers empty nearly as quickly in the summer months that follow, with predictable effects on cash flow and payment times.  

Let’s take a look at how the cycle works, based on several years’ worth of Xero data and interviews with small businesses.

As Christmas approaches, consumers loosen their purse strings and retailers in particular benefit. At Xero, the number of businesses with positive cash flow typically peaks: we’ve seen it rise in past years as high as 57 percent in December, compared with less than 50 percent of businesses in the preceding months.

“Christmas is just absolutely ridiculous,” says Pippa Oostergetel, founder of Melbourne-based clothing designer Squeak. “Half of my annual revenue comes from this single period.”

The influx of revenue feeds a virtuous cycle in which bills get paid sooner. Last December, the average payment time on a 30-day small-business invoice was 34 days. While that’s still late, it’s a marked improvement from 38 days some months earlier.

We don’t have data yet for December 2018 yet but the good news is that each December for the past four years has seen an improvement in payment times. Invoices that took an average of 38 days to be paid in December 2014 were paid four days faster in 2017. Will 2018 continue the trend and be the best year yet?

Sir Isaac Newton famously said, what goes up must come down. That holds true for trading conditions too. Retailers flush with Chrismas cash will watch their pile of banknotes shrink as January holidays slow business and they pay suppliers to replenish inventory in the new year.

The annual nadir for cash flow typically arrives in February. This year, the percentage of businesses with more money coming in the door than leaving fell to 49 percent that month. Not surprisingly, a cash crunch slows the settlement of invoices: payment times swelled by several days, reaching 37 days.

“I always tell my accounting clients, if you don’t get your invoices in by the first half of December each year, there’s a good chance you won’t be paid till February,” says Mark Lawry, a partner at Melbourne-area accounting firm Suntax. “I wish more small businesses understood this.”

If you own a small business and want to be better prepared for the volatility that comes with running a business before and after Christmas, be sure to check out these tips in Practical tips to avoid the summer slump. And follow our monthly updates of Xero Small Business Insights metrics, which we’ve just refreshed for Getting Paid, Hiring People, Cash Flow and Trading Overseas. Happy holidays!