December Cash Flow: The Two-Payroll Month and What a CFO Does
December cash flow for a small business is the worst of the year, and it’s worst for the businesses that had the best year. Revenue is high, because the fall was busy. Cash is low, because the biggest payroll, the bonuses, the sales tax from that busy fall, and the vendor bills for it all land in the same three weeks that customers stop paying. The P&L says December was great. The bank balance on December 28 says otherwise, and both are telling the truth.
We run an accounting firm and we watch this happen to profitable clients every year they don’t have a forecast. Here’s the month, week by week, and the four things that move it.
Why is cash so tight in December when sales are high?
Because revenue and cash are different things, and December is the month where the gap between them is widest.
Revenue is recorded when you invoice. Cash arrives when the customer pays, thirty or forty-five days later, and in December that lag runs into the holidays. So the strong November you just had shows up as revenue in November and as cash in the second or third week of January. Meanwhile, the costs of that strong November, the overtime, the materials, the subcontractors, the sales tax on it, are due in December. The best month of the year, on the P&L, produces the worst week of the year, in the bank.
Week by week, Thanksgiving to January 31
Week of Thanksgiving. The first slowdown. Customer accounts payable departments are short-staffed from Wednesday. Checks that would have gone out Friday go out the following week. Your own payroll runs on schedule.
First week of December. Payments catch up briefly. This is the last normal week of receivables, and it’s the week to have already invoiced everything that can be invoiced, because anything sent after this lands in the dead zone.
Second week of December. Regular payroll. If your state sales tax is due monthly, the November return and payment, which is often the largest of the year because November was busy, is due around the 20th. Vendor bills from the fall are coming due on their terms.
Third week of December. The bonus payroll, if it’s here, and the second regular payroll of the month for anyone on a biweekly schedule that lands two in December. Payroll taxes on both, due within days on a semiweekly deposit schedule. Customer AP staff start leaving around December 18. Incoming payments drop to almost nothing.
The last two weeks. From about December 22 to January 5, nothing comes in. Bills still go out. Any auto-debits, loan payments, and rent hit on their usual dates. This is the week the balance bottoms.
First two weeks of January. Customers are back, and the December 5 invoices get paid around January 4 to 8. But January 15 brings the fourth-quarter estimate and the monthly payroll tax deposit, and the first payroll of the year is in here too.
End of January. The fourth-quarter 941, the annual FUTA return, W-2s and 1099s, and the state equivalents. Small amounts, but on the list. By now receivables are normal again, and the crunch is over until next year.
When do customers stop paying in December?
From the week of Thanksgiving, briefly, and then in earnest from about December 15 through January 5. It isn’t that customers decide not to pay. It’s that the person who cuts the check is on vacation, the approval chain has a link missing, and the check run that would have happened December 26 happens January 9 instead. Any invoice you send after about December 10 should be assumed to pay in the third week of January.
Why revenue lies
Owners who run the business from the P&L see a strong December and spend accordingly: the bonus is generous, the equipment purchase gets pulled forward for the tax deduction, the new hire starts January 2. Every one of those decisions is reasonable against the revenue. Every one is a cash-out in the exact weeks when nothing comes in.
The number that should drive December decisions is the projected bank balance in the deepest week, and that number only exists on a forecast.
The moves
Four things move, and each has to move before December to work:
- The bonus date. Run it as a separate payroll in the first week of December, or on the second-week regular payroll, so it lands while receivables are still arriving. A bonus in the third week collides with the sales tax deposit and the dead zone.
- Early billing. Everything invoiceable goes out by December 5. Progress bills on running work, retainers for January, the change orders nobody wrote up. The goal is to pull as much of January’s cash into the first week of January as possible.
- The line of credit. Sized to the deepest week on the forecast, confirmed or opened in November, drawn before the third week rather than on the day it’s needed. Banks have holiday schedules too.
- The estimate as a line item. The January 15 estimate goes on the forecast at its real number, next to the January payroll taxes, so the second-deepest week is visible and planned for.
How do I prepare for slow payments over the holidays?
Assume they’ll happen, and plan the month as if the last two weeks bring in nothing. Invoice early, collect early where you can with a gentle reminder in the first week of December, hold the discretionary spending until the January receivables land, and have the line in place before the bank goes quiet.
What a CFO does with this number
A fractional CFO reads the December forecast in October, when there’s still time to move things, and moves the four items above. Then the forecast is updated every week through January, because the plan changes when the customer who always pays on time is late for the first time in years, and it will happen in December.
The difference between a business that has this and one that doesn’t isn’t the size of the December problem. It’s whether the owner knew which week was the hard one in October, or found out on December 27.
Where we come in
The 13-week forecast is the first deliverable in our advisory tier, and December is why. It’s built from books closed by the 10th, so the starting balance is real, and it’s updated weekly. The four December moves get made with every client in October and November, and the fourth-quarter estimate goes on it at the number we calculate, not the voucher. If your best year ever ended with a scary week between Christmas and New Year’s, reach out. We’ll show you the deepest week before it arrives.
Frequently asked questions
Why is December cash tight when revenue is high?
The biggest payroll, bonuses, sales tax, and vendor bills from the busy stretch all land while customer payments stop for the last two weeks of the month.
When do payments slow down?
From the week of Thanksgiving and again from about December 15 through January 5, because AP staff are out.
What can I move?
The bonus date, the December billing to the first week, and the line of credit setup to before the holidays.
