How does your holiday closure affect profitability?
December ‘busyness’ can be deceptive. For businesses that sell time (like accountants or lawyers), or are B2B, it is one of the least profitable months. You and your team might be flat out in the days running up to the holiday closure. But come January, one look at the Profit and Loss Statement shows there may not be much profit for your labours. There may even be a loss.
December had been a busy month in Dave’s small business. This was his first year in business, and he and his team had been flat out getting customer orders made and shipped. By Christmas Eve all the jobs were completed. Dave wished his staff a happy Christmas and closed up for the holiday.
Then in January the financial pain hit. Even though December was very busy, sales were lower than the previous months. This meant less money coming in from customers in January — especially because he’d not done the invoicing for December before he closed up for the holiday.
Meanwhile, rent, wages and overheads were the same as in the rest of the year, all of which meant cash was tight in January. It wasn’t exactly the way he hoped to start the year.
Silly seasonal ups and downs
Unless you’ve stashed away cash during the rest of the year, this lower profit soon leads to tight cash flow. In the franchise business I used to work in, it was fairly common for franchisees to find themselves short of cash in the first couple of months of the new year. Talking to our clients, we know this is a common problem — even for experienced business owners.
Seasonal ups and downs are part of business. Almost every business has them. But the smart approach is to do what you can to reduce the intensity of the peaks and troughs. The starting point is to understand why your Christmas holiday closure leads to low profit and poor cash flow.
Let’s take a look.
Doing the math
The problem typically arises from the link between number of trading days and how much income your business can make in a month. In December, if your business closes between December 23 and Jan 1, there are 17 trading days compared to 21 trading days in November. That’s 20 percent fewer business days to make products, complete jobs, sell items, invoice customers, and so on.
But in that same short month your wages costs, rent and overheads are pretty much the same as a normal 21-day month. There might even be additional expenses, such as Christmas celebrations or staff gifts.
Put these things together and profit will often turn out lower in December than in other months — even though people feel very busy.
Then January comes along. Sales may also be a little slow as people take time to get back into the swing of things. Meanwhile you have the December bills to pay, and the cash flow crunch commences. Somehow you make it through, but next year the same thing happens.
Managing cash flow
It doesn’t need to be like this. In fact, Dave learned an important lesson from that first Christmas and his new year cash crunch.
Dave did things a little differently as he approached his second Christmas in business. Rather than worrying about whether he’d be able to get through all the work in December, he wanted to have orders in place for January. So he increased his marketing efforts in November and December. Also, he made sure the bookkeeper sent out as many invoices as possible well ahead of Christmas.
He kept expenses down in December by avoiding unnecessary purchases. Finally, he worked out how much cash he needed to cover wages and supplier payments over the holiday period. This meant he could set aside enough cash to meet the expenses.
In his second year in business, Dave had a record month of December sales, cash in the bank to pay the bills — and he even made a profit in December! It made for a much better start to the new year.
If your business tends to have a profit boost in December and a cash flow crunch in the new year, there are some things you can learn from Dave.
READ: Understanding cash flow
Four tips to stay on top of holiday cash flow
Here are four things you can learn from Dave:
- Boost your December sales
Complete and invoice as much work as possible during the month of December.
- Create business for January
Initiate marketing programs early in December to drive business through your doors in January.
- Defer unnecessary expenditure
Don’t make purchases in December that can be deferred to January or later.
- Know your January expenses
Keep a careful track of the expenses and bills to be paid in January. This way you’ll know exactly how much cash you’ll need to cover them. Once you know the amount, you’ll be able to work out how to cover it.
The key is to look ahead and plan for what you see — which is one of the most valuable business skills to develop. So, before you get busy with December, take some time to look ahead to January and work out what you can do to put your business in a better financial position for the new year.