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7 Steps to Overcoming the February Cashflow Crunch

Chris Waterson

February 2, 2015

Cashflow, Cashflow improvement, business


Every year, we are alerted to the fact that January and February are traditionally the ‘cashflow crisis’ months. This year, depending on your industry, it could be even worse.

Personal debt is at record highs, the cost of living has gone up and the some businesses are doing it tough. On top of this, February is BAS month for all quarterly reporting entities. While most businesses appreciate the extra time to complete their December accounts and pay their quarterly BAS, it coincides with what is often a poor cashflow month for business leaving many struggling to pay. In fact, it has been mentioned several times recently that the ATO is one of the biggest funders for small business. That is, many businesses have long term payment arrangement with the ATO for their taxation liabilities.

The February cash squeeze will affect almost every business. Those with reasonable levels of cash reserves will manage it without too much pressure, but these businesses represent no more than 20 percent of the small business population. For the rest, the impact of the squeeze will range from going through a period of cash distress and in the worst cases, liquidation – and don’t think this won’t happen to you!

In order to overcome this, and also to prevent it happening in the future, follow these seven steps:


Have a look at your short term cashflow commitments. You need to complete a realistic assessment of what funds you expect to collect during the month. With this information you can calculate how close to the line you will be. Don’t wait until the BAS is due, or until the end of the month before working out if you are going to fall short.

I believe that all businesses should have a live and working cashflow forecast that tells exactly how much cash they will have in the coming months, and notifies you when there is a pending shortage approaching.

The number one rule is not to manage your business from the bank balance. It doesn’t tell you what cash is about to come in and what is about to flow out.

Improve Gross Profit

The best way to achieve this is by selling your highest profit products, so promote these before you promote lower profit products. To do this, you and your team must know the margin on each sale.

It is also worth talking to suppliers regarding their pricing. It is often the case that salespeople will do anything to get the sale, especially with larger businesses. So, make this work for you; you may find a nice price discount coming your way. We have had several examples of our clients getting several percentage points of discount from their largest suppliers, just by asking the question.

Expense Management

Don’t overcommit for the month and only use working capital for larger capital expenditure items if you are certain that you can manage all of your working capital demands.

The other thing to be aware of is that in today’s age of direct debits, business owners can become lazy about expenses. Often they’ll sign up to a monthly subscription for a particular product or service, and then several years later are still paying for this when they don’t really need it.

Analyse each and every expense for necessity.

Collect your debtors as soon as possible

All of this cashflow doom and gloom means that your debtors are picking and choosing who they are going to pay. Businesses under cashflow pressure are more likely to pay the creditors who are chasing them than the ones who are silent.

The first step in your debtor management is to have a documented credit policy and to follow it. Again, don’t wait until the end of the month to chase debtors, as that’s probably when everyone else is chasing them as well!

The second step is not to wait for the end of the month before invoicing your customers. This is standard practice for some businesses, but it can be a cashflow killer. Some customers pay immediately on invoice, so get the invoice to them as soon as you can.

We also had a great success with a client in changing his invoicing system. In his business he had previously charged a 5% deposit before the job could start (he is in construction). We calculated that he needed to increase this to 15% to ensure he wasn’t cashflow negative on any of his projects, so he did. End result, no cashflow stress and no complaints from customers.

Finally, the fast money is in the just overdue category. Give the 90 days plus a rest for a while and focus on getting reminders out to those that are just overdue. You will get better results for less effort and the number of accounts moving to the high end of your aged trial balance will reduce.

Creditor Management

If needed, it is certainly possible to negotiate trading terms with your creditors. If they provide payments terms of thirty days, then use the full thirty days.

Some will provide discounts for paying up front or for paying by a certain date. You need to analyse the benefit of the discount as compared to the cash leaving your bank account earlier.

If you are having trouble paying creditors, then the first thing to do is communicate this with them. Most business owners would prefer to be aware of the situation rather than just being kept in the dark.

Stock Control

Any business that holds stock will have suffered from the times where stock levels are above an optimum level. From a cashflow perspective, the cash is “on the shelf” rather than in the bank. Strategies to rapidly reduce stock and get some cash back in the business include:

  • Closed door sale
  • Bundle slow moving stock with faster moving items
  • Mail, email or fax out inventory specials to your customers

From a long term prospective, you also should consider a stock tracking system to ensure stock levels don’t go beyond what is required.

Debt Restructure

Restructuring of debt can also free up available cashflow. It might be that loans to go interest only rather than paying off principal. Alternatively a short term overdraft increase can provide some relief for the more difficult months. Be aware that in most cases these should only be viewed as short term solutions, or otherwise increased debt levels can become the norm.


If debt restructure is to be used, make sure you communicate early with your bank.

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