by Ciaran Fagan

Facing the new year

Business challenges entrepreneurs face at the start of the new year

Small businesses have challenges to overcome at the beginning of the new year

Christo Botes, a director at Business Partners, says the first two months of a new year are especially challenging for small businesses. “It may not always be possible to avoid the realities of a business cycle, but it is possible to plan and manage the effects of this difficult period.”

Botes highlights some of the key areas entrepreneurs need to pay special attention to during the first two months of a new year. “The bottom line for small businesses will not be as high as a normal trading month due to less sales and transactions taking place. This can be attributed to low consumer spending, as the bulk of their disposable income would have been spent on holidays, away from their normal shopping areas. 

“Consumers also usually have to make large payments for education in January, such as school and university fees, which would otherwise have been spent on other discretionary items.”

Botes adds that the bottom lines of small businesses are significantly affected by other larger businesses closing their doors for the festive season.

“Many manufacturers, construction businesses and other service providers only start operating again during the second week of January. This means there is a two- or three-week period where these companies are not buying raw materials or goods and services from small businesses. 

“Stock levels at the warehouses of wholesalers and manufacturers may also be low due to the three weeks of no manufacturing, which could limit supplies to retailers. This will then have a domino effect on small businesses sales, as there isn’t stock to supply to the consumer.”

Botes says that during the month of February, small businesses need to consider upcoming tax deadlines. “Many businesses have February year-ends for accounting purposes and hence need to make their second company tax payment. Individuals, mainly business owners, are provisional taxpayers in their individual capacity and therefore need to pay their second provisional tax payment by 28 February. This can potentially lead to cash flow pressure and implications for both the business and individual, as the businesses profits are not always reflected in the cash flow due to, for example, clients having not yet paid for the goods and services they bought from the business."

He says that creditors could be very high over December and January, as businesses often purchase more stock than usual for the spending spree of shoppers from mid-November to the end of December. “In January or February, these creditors move into the 30 or 60 days category and become due and payable.

“But while a business may reflect good sales over this period, not all this revenue would have been banked and be available for creditor payment. Part of the banked money could have been spent on staff bonuses and vacation costs, or there may be higher than normal debtors who are unable to pay within the terms, especially in January, due to their cash flow being under pressure as well which, ultimately, creates a ripple effect throughout the economy." 

Botes says that in order to avoid the pitfalls of these additional challenges, it is crucial entrepreneurs understand their business cycle. “Entrepreneurs must plan their cash flow accordingly in order to provide for lower sale figures, lower debtors payments, bonus payments, lower stock levels at suppliers and provisional tax payment obligations.

“This can be done by saving capital in a call account in the normal trading months of the business, normally about nine to 10 months of the year, and making arrangements with your bank manager to have sufficient facilities available to continue trading.”

He adds that the business realities entrepreneurs must face, and probably the most important lesson in business, is that a business cycle and cash flow do not run according to a straight line. “There will always be peaks and valleys within a year and over economic cycles. While entrepreneurs cannot predict these ups and downs, they can prepare for most of the possibilities to ensure they are covered for most scenarios they may face,” concludes Botes.

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This edition

Issue 39