Journal entry

Why February is a scary month…

By February 27, 2023 June 30th, 2023 Reading time: 6 minutes

A couple of months into the new calendar year, an enjoyable break away for holidays, time to jump back into the business, and then ouch… February comes along and anxiety takes hold for SME business owners, what just happened?

February has a lot in common with August – take a look at our article, The three critical things SMEs need to be aware of in August. Like August, February has a number of Statutory payments jammed into a single period, which can cause a lot of anxiety for business owners, but ensuring you look ahead and have a plan is important.

Let’s dive into this…

What’s the first (and biggest) hit? A build-up of Statutory obligations…

For those business owners that are on a quarterly Business Activity (BAS) cycle and a monthly Instalment Activity Statement (IAS), February is a doozie. February is the month when payments are due for your December BAS (payment on the 28th), as well as IAS for January (payment on the 21st). If you read our August article, this weird compounding of payment obligations also occurs, but what makes February different?

Secondly, February comes after January, duh, but the problem people face is December / January businesses shut down, which means accounting / AP teams go on holiday, and payments are made slower, which tends to translate to a blowout of Accounts Receivables. This might mean that there may be an influx of cash in February – happy days, but if your cycle spans say more than a month (common for SMEs), then this means you may not receive your December / January incoming until well into March.

Let’s put some numbers to this to help us quantify this a little.

BAS over a quarter represents:

  • 10% of your sales for the quarter (netting off your operating expenditure). If the business is people-heavy, this is even worse as you’ll have even less operating expenditure to net off.
  • 20 – 30% of your quarter salary bill, which represents the Pay As You Go (PAYG) Withholding that a business pays to the tax office on behalf of its employees
  • 20 – 30% of your monthly salary bill, PAYG withholding for January

For a people-based business (professional services) with a turnover of $1m, employee salaries of $550k, and operating expenditure of say $150k, the net cash outflow for the period equates to:

  • $25k – $4k = $21k (quarterly equivalent of 10% of revenue – 10% of operating expenditure)
  • $500k (Salaries less super) / 12 * 4 * 25% = $48K (4 periods of PAYG withholdings assumed to be an average of 25% of salary bill)
  • This example even assumes that there are no company income tax withholding requirements, which will make the figure even larger.
  • This totals to $21k + $48k = $69k.
  • This is the rough equivalent of 10% of full-year operating expenditures or a touch over a full month’s operating expenditures, this is a lot if a business hasn’t prepared for it.

In my time at the bank, as well as my years running this business, I have seen this cycle repeat consistently and is particularly nasty for businesses that are growing (revenue or headcount growth). We’ll go into detail as to why in another article, but the core issue is growth costs in some way.

Inflation is beginning to take hold and is starting to create problems for economies the world over. Without sitting here delving into some of the underlying factors of how we got here (it’s a discussion for another time), the main takeaway is that it creates a negative sentiment toward investment, capital expenditure, etc. People are being more careful about their spending or investments, and people are more careful about payments.

The question from here is, what can one do about it…?

If you’ve gotten this far in the article then maybe you’re in this position, it’s, unfortunately, a common occurrence for many small businesses.

There are a few levers to leverage, each with its respective pros and cons.

1) These periods occur consistently, so preparing for this is something one can pre-plan for. Of course, I’m going to say running a three-way cash flow forecast is very important as it helps to identify periods that have heavy cash outflows. In these cases, cash account allocation, holding a cash reserve, or retaining sufficient cash in the business will help prepare a business for these circumstances. Similarly, having forecasts can also assist with planning for other eventualities.

a) A subset of the above is to not run your business via your bank account, it can be the quickest path to running a successful business into the ground. Read our article about this.

b) A weekly cash flow (often done as a 13-week cash flow) can be employed as it covers one quarter of trading.

2) Assuming the above steps were missed, a number of options are available, and they usually rely on external financing.

a) Firstly, identify that this is a short-term cash flow issue. This is an important first step.

b) Ensure forecasts have either a clear set of active projects or pipelines that will support future expenditure.

c) Approach your lender (ideally as part of pre-planning, but it’s better late than never), and have a clear discussion about short-term “working capital” lending facilities. This might be an overdraft, invoice/debtor, or trade finance-style facility.

d) Available trading history, access to available security, or the types of clients you work with may dictate the type of lending facility available to your business.

e) In some instances, options may be limited, and approaching fintech or other types of lenders can be an option, but be aware of terms/conditions and interest rates that may be applied in these cases – rates could be high and terms quite strict.

3) Asking your creditors for some payment timing leniency, or entering into a payment plan. Keep in mind, it is in your creditors’ best interest that you continue to operate and pay their outstanding bills in due course. Having an open and honest, as well as a reasonable approach can often provide a beneficial outcome for both.

4) Finally, and the most obvious creditor to approach is the ATO and applying for a payment plan. Depending on the type of business, the ATO can at times be your largest single creditor. It can be useful to apply for a payment plan over a reasonable period. Keep in mind that delaying payments only provides you with short-term cash flow until the next cycle arises, so ensure that future cash flows are built up to clear out the payment plan and ideally pay out the next set of statutory obligations (do a cash flow forecast!).

a) One important thing to note with this option is that the ATO has the greatest set of powers to collect. As a banker, on a couple of instances I have received and carried out Garnishee orders, which as a banker means I take funds straight out of available bank accounts and transfer it to the ATO – it’s not pretty.

b) Further, taking on a payment plan with the ATO can be convenient, but it can significantly hamper any requests for lending from other financiers, in particular tier 1 lenders. ATO Portals are a common information request as part of lending due diligence (a requirement to not have ATO arrears is a common lending roadblock). These lenders may ask you to pay out these payment plans before any lending will be available for the reason that ATO is the first cab off the rank when it comes to collections, so be aware.

As you’ll see from the above, there are a few options to consider, but trying to achieve item 1) is obviously the least stressful, and often involves consistent planning and forecasting. It’s an important discipline to have for any business, most importantly growing businesses. It’s even more important when there’s economic uncertainty, or your business doesn’t have sufficient reserves.

Until next time, thanks for reading.


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Jun Yan

Jun Yan

Jun Yan is the co-founder and director at Ravit Insights. Prior to this, he was a commercial banker at NAB.

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