Proactive cashflow planning key to SMEs surviving January cash crunch

As small businesses enter the critical festive trading period, which often sees November and December sales account for significantly more than 20% of annual retail revenue, SME services provider Lula recommends business owners to focus on proactive liquidity planning.

The company says the most strategic time to secure or increase working capital facilities is when finances are robust, not when the inevitable January cash crunch hits.

The festive season presents immense growth potential, with industry data showing continued year-on-year increases in consumer spending.

Industry reports show that the retail industry generally experience a significant surge in transaction volumes during the 2024 Black Friday period, highlighting the potential for short-term revenue spikes.

However, this growth places immediate strain on cash flow as businesses commit capital upfront to cover seasonal demands: bulk inventory purchasing, increased operational expenditure, supplier payments, and staff bonuses.

"The festive season is a double-edged sword for many SMEs," explains Garth Rossiter, Chief Risk Officer for Lula.

"The turnover is often excellent, but the lag between the increased spending on stock in October/ November and final cash collection in January, coupled with end-of-year obligations like bonuses, creates a pronounced liquidity squeeze in the New Year. This is what we refer to as the 'January Cash Crunch'."

 Rossiter emphasised that managing this seasonal fluctuation requires rigorous liquidity planning starting now, while sales are strong.

Businesses must accurately forecast not only their December revenue but also their expenses and obligations extending well into February.

The company encourages businesses to utilise tools to build this detailed forecast.

Key financial obligations that must be balanced against high turnover include:

• Supplier payments: Ensuring prompt payment for the increased stock bought on credit terms.
• Staff bonuses and leave pay: Honouring end-of-year commitments to retain skilled labour and maintain morale.
• January overheads: Covering fixed costs, rent, and utility bills during the traditional post-holiday slowdown.

Businesses should use high-revenue months to build financial reserves, consciously ring-fencing excess cash or ensuring they have access to alternative funding should the need arise.

Rather than spending all of it immediately, this provides a critical safety buffer.

The critical advice to the SME sector revolves around timing the application for external funding.

Data indicates that access to finance remains a persistent challenge for South African SMEs, which collectively are approved for considerably less credit than large corporations (while contributing around 40% of GDP, they only receive around 11-13% of credit).

Traditional financial institutions are inherently risk-averse, and their assessment of a business's creditworthiness is based on current financial health.

 "If a business waits until they are struggling to meet their January obligations to apply for funding, the chance of a successful application decreases significantly," says Rossiter.

"The best time to apply for a working capital increase, or to establish a cash flow facility, is when your trading is strong with a healthy cash movement, which is usually during the festive boom. By organising access to capital now, businesses ensure they have the financial headroom to meet short-term obligations and cover unexpected dips in the new year.

 "Don't wait until the water runs low to dig the well," Rossiter said. 

"Be prudent, plan your outflows meticulously, and secure your financial safety net now. Small businesses are the engine of our economy but, without proactive cash management, success over the festive season may not translate into sustainable growth for 2026.”

BUSINESS REPORT