We all know that managing cash flow is one of the key challenges and priorities for small businesses. While we want to see more coming in than going out every month, we know that’s not always possible. Whether your firm is in catering or construction, recruitment, or retail, there’s bound to be a seasonal element to your business.
January and February can be the cruelest month for many businesses, following a short working December, late payment from customers, or a dip in discretionary spending. For others, the seasonal gap might appear over Easter or in the summer months. Wherever the drop falls for your business, you need to plan for it effectively.
1. Better Planning, Better Accruals
The best way of dealing with seasonal cash flow issues is to accrue a cash buffer when times are good.
Many businesses have reserve bank accounts where excess cash is saved, taking it out of the everyday bank account. It can then be transferred across to the current account when required. (Note that many business bank accounts come with monthly fees, so beware of adding extra cost).
Also, we can ensure we keep up to date with payments to suppliers when cash is available. We should accrue for VAT and tax bills as well as looking at more innovative opportunities to generate revenue in the off-season.
However, we all know that no matter how much we plan, sometimes we end up with a cash flow short-fall at certain times of the year.
2. Arrange a Business Overdraft
The business overdraft can be ideal for seasonal traders – allowing you to pay interest just for the days you have money outstanding, rather than for the full term of a loan. You will need to set your overdraft up before you need to use it. Many business bank accounts won’t let you use an unauthorized overdraft – but if they do, charges are likely to be very high. It’s much better to plan and set the facility up before you need it.
Sadly, business overdrafts are increasingly few and far between these days as many traditional banks reduce lending to small businesses, and some of the new challenger banks aren’t able to offer them at all.
3. Use a Credit Card or Revolving Credit Facility
A revolving credit facility works in just the same way as an overdraft, except your bank doesn’t provide it. Just like an overdraft, you can borrow from a pre-arranged amount and only pay interest for the days you have the money drawn-down. And they can be quick to arrange – several alternative finance providers use innovative screening methods to ascertain whether your business is creditworthy, often in just minutes.
Credit cards, of course, can be a good way of effectively deferring payment, though if you don’t pay the full amount outstanding at the end of the month, charges mount-up soon. As with most finance facilities, you will need to plan ahead and arrange a credit card before you need it.
4. Bring Revenue Forward With Invoice Finance
If your business invoices other businesses, invoice finance might be a useful tool, enabling you to receive payment within a day or so of invoices being raised, rather than waiting the customary 30 days or more.
There are several different types of invoice finance – the main two being Factoring and Discounting. With both, your customers will be paying the finance provider rather than you directly, but with invoice discounting, they are less likely to know you are using an invoice finance company. This is why it’s often called confidential invoice discounting.
Again, planning is crucial as it can take a little time to set-up an invoice factoring or discounting contract. However, spot factoring (also known as single or selective invoice factoring) can be quicker to set-up.
5. Arrange a Merchant Cash Advance
If you take payment from credit and debit cards, you may be eligible for a business advance (often called a merchant cash advance). The provider will advance you the cash, and you pay back directly out of future card revenues. Typically, these facilities charge a set amount rather than interest over a fixed term, meaning when your revenue is lowest, so are your payments – but without incurring additional interest.
Whichever approach you take to managing seasonal cash flow, you need to plan effectively and in advance. While it is possible to deal with a sudden cash-flow crisis, it is harder and often more expensive to do so. By planning in advance, you will have peace of mind and be better able to get back to doing what you do best – running your business.
If you take the debt finance approach, it’s always advisable to speak to an expert about your business and your requirements. If you talk to a reputable business finance broker like Touch Financial, you won’t have to pay for their service.
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