Plan now for the summer slowdown: the NZ business cashflow guide

It's October. The sun is finally out, the diary is full, and Christmas still feels a long way off. Which is exactly why now is the time to think about January.

For most New Zealand businesses, December to February is the most predictable cash squeeze of the year. It turns up every summer and still catches people out. Because it's predictable, you can plan for it. The planning just needs to start before the busy season swallows your attention.

Why summer is so hard on cashflow

Three things hit your cashflow at once over summer.

Money coming in slows down. Customers close for the break, decisions get pushed to "after the holidays", and invoices sent in mid December often don't get paid until late January. Even businesses that are busy over summer can find their cash lags behind their sales.

Money going out does not. Rent, loan repayments, subscriptions and insurance carry on whether you're open or not. December payroll is usually the biggest of the year too, with holiday pay for the closedown, public holidays and sometimes a bonus or two all landing in the same few weeks.

Tax arrives just as everyone comes back. 15 January is a big date. GST for the period ending 30 November is due, and so is provisional tax for most businesses with a 31 March balance date. PAYE and quarterly FBT follow on 20 January. That's a lot of money going out in the slowest weeks of the year.

For most businesses, the lowest bank balance lands in mid to late January, just as you're getting back into gear.

Step 1: Look at what happened last summer

Your best forecast for this summer is last summer. Pull up your cash in and cash out for December, January and February last year. In Xero, the Cash Summary report lays this out month by month.

Check how far income dropped, which months spending ran higher than income, and how long it took for cash to recover. If last year's low point made you nervous, this year's will too, unless something changes.

Step 2: Map the next four months, week by week

Monthly numbers hide the real pinch points. A week by week view from now through to the end of February shows you exactly when the pressure lands.

Start with what you already know:

• Your closedown dates and your last invoicing day
• Each payroll, including the bigger December one
• Rent, loan repayments and any annual renewals
• 15 January (GST and provisional tax) and 20 January (PAYE and FBT)

Then add your expected income, and be honest about when customers actually pay, not when the invoice says they should. Our post on the advantages of a cashflow forecast covers what a good one includes.

Step 3: Bring cash in before the break

The cash you collect in November and December is what carries you through January. A few simple moves help:

• Invoice early and often. Don't wait until the end of the month, or worse, until you're back in January. If the work is done, bill it.
• Ask for deposits on work booked in for the new year.
• Clear the overdue list in November, while your customers are still at their desks.
• Make paying easy, with a payment link on every invoice and automatic reminders switched on.

Our guide to getting paid faster covers each of these in more detail.

Step 4: Know your buffer number

Once you've mapped it out, you'll see your lowest point. That's the number to plan around. The aim is to head into December with enough cash to cover that low point, plus a margin for the things you can't predict.

If you've been putting a percentage aside for tax through the year, as we suggested in the set-aside system, January's tax bills are already covered. Your buffer then only has to carry the business itself.

Step 5: Make your decisions now, not in January

If the forecast shows a gap, October is the time to deal with it. You have options now that you won't have later:

• Timing larger purchases for after February, or bringing them forward while cash is strong
• Talking to your bank about an overdraft facility before you need it, not once you're already short
• Talking to us early if a tax payment looks tight, so there's time to work out the best approach

Raise it in October and you have time to sort it. Leave it until mid January and your options are thin.

What's coming next

Over the next few weeks we'll look at the summer pieces that cause the most problems: holiday pay and the December payroll, getting your invoices out before you switch off, and how big your summer cash buffer needs to be.

Where to start

Block out an hour this week to look at last summer's numbers. That one hour will tell you most of what you need to plan for.

If you'd like a hand building your summer forecast, or working out what your buffer number should be, we'd love to help.