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• 21 Nov

  6 Ways To Solve Seasonal Cash Flow Problems

  As we head toward the Christmas period many companies will be beginning to experience seasonal cash flow problems.

  Therefore, below I have set out 6 ways to solve seasonal cash flow problems.

  At the bottom of this post, you will see that there are some further resources, such as case studies and articles, that you may also find helpful.

  Before setting out the solutions to the problem, the causes need to be understood:

  • High seasonal demand for goods

    If you sell a product that sees a surge of increased sales around the Christmas period, large orders can be received in the run-up to Christmas. That leads to increased production, to satisfy the orders, and this, in turn, leads to increased expenditure on raw materials and staff costs e.g. for overtime. Those purchases need to be paid for, often before you see the inward cash flow of payments in respect of those orders.
    
    

  • Slow down in payment by suppliers

    Debtors seem to take longer to pay around the holiday period. It may be due to payments processing staff holidays or just because their own cash flow is tighter around that time of year. Either way, the effect is the same, you may end up waiting longer to get your invoices paid by your customers, depleting the amount of working capital that your company has available.

  In both cases the outcome can be the same, a dip in the amount of working capital that your company has, leading to a cash flow headache for whoever has to manage the company cash flow.

  6 Ways To Solve Seasonal Cash Flow Problems

  Here are some ideas that might help solve that problem:

  1. Invoice customers quickly, pre-dunning and reward faster customer payments

     Don't delay raising customer invoices - get them out to the customer, and confirmed as received as soon as possible. If you send invoices by post then perhaps look at the possibility of emailing them. That could cut a couple of days off of your debt turn immediately. If you email your invoices, make sure that you have a confirmation of receipt, otherwise, you could wait 30 days to find out that it is sitting in someones "trash" folder.
     
     Pre-dunning is another possible approach. This means starting your invoice chasing cycle before the invoice is actually due. This can help identify any problems early on, e.g. needing a copy invoice, speeding up receipt of payments.

     Discounts for customers that pay quickly may help you get money in faster. You may feel you could trade a few percentage points for the reassurance of receiving that cash earlier in the payment cycle.

  2. Increase stock turnover

     If you can increase the speed of your stock turnover you could reduce stock levels that you hold, and hence the amount of cash tied up in your stock. You might achieve this by optimising your supply chain by buying smaller quantities more frequently. You will need to weigh up the effect of this on any bulk purchase discounts.
     
     It is also possible that some invoice finance companies will take a proportion of your stock into their funding formula - so you can release money against stock holdings.

  3. Selective invoice finance

     During peak cash flow requirements, selective invoice finance can work very well for companies. It allows you to select single invoices or groups of invoices and to access finance against their face value. You might be able to get say 85% of the value immediately, with the balance (minus fees) passed to you when the customer pays. This can produce a significant positive cash flow benefit to your company. The big advantage of selective invoice finance is that it is unlikely to have any minimum levels of contractual lock-ins, so you can use it just to get you over your seasonal peak trading - then you don't have to use it for the rest of the year.

  4. Diversification

     Look for other trading activities that could help even out your seasonal trading pattern.

  5. Take more supplier credit

     By delaying supplier payments you increase the working capital of your business. If you pay early, consider paying to terms - it may be worth foregoing early payment discounts in order to hold onto your cash for longer.

  6. Request customer deposits or reduce credit terms

     You could request that customer's pay a percentage in advance. Alternatively, reducing credit terms granted to customers will also bring a cash flow benefit to your company.

  It is key to consider the ramifications of whatever changes you are thinking of making and to model their effect on your cash flow forecast before you go ahead.

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  Other Resources

  Article - 10 Ways To Improve Cash Flow

  Case Study - Funding A Seasonal Toy Manufacturing Business

  By Glenn Blackman