How to solve problems with business cash flow during the slower trading months!

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Tuesday, August 1, 2017 at 9:09AM

For business owners, the summer months can notoriously be a tight period for cash. With productivity levels down due to staff being on annual leave, a slower sales period with key customers on holiday, plus you may have high stock levels or high work in progress due to extended production periods and all compounded by having slow paying customers!

You may have had a strong trading period during the first six months of the year, but turnover, profit and particularly working capital can take a dip through the summer months and often never really picks up till late October. Plus, you’re likely to have VAT to pay at the end of the first week in August!

According to the Office for National Statistics (ONS) only 45% of start-up businesses survive beyond five years and 70% of VAT registered business don’t trade past ten years. This doesn’t mean the businesses that fail or cease trading are bad businesses or didn’t have attractive products or services, as a number of studies show that 80% of business failures are due purely down to poor cash flow management.

What can you do to ensure that your businesses doesn’t become a cash-flow casualty?

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1. Have a plan: If you're expecting declining (or even increased sales) through the summer, plan and plot the likely impact of any associated costs and the resources required.

2. Know your numbers: Having enough funds available for working capital is critical, so create a cash flow forecast and understand the minimum amount of money required each month to run your business. This may be to pay staff wages, utilities, suppliers and taxes, etc. Ensure you have this amount in your bank at all times or arrange an extended overdraft facility or short term loan to cover the potential shortfall.

3. Invoice early: Most businesses don’t invoice early enough, so make sure that any products and services are charged to the customer as soon as they are delivered, so the clock starts ticking on your payment terms straight away.

4. Chases debtors: Check your bank account daily and stay on top of who owes you money, then spend time contacting them for payment. Using online accounts systems are excellent in helping you manage this process. If you don’t have time yourself, allocate this task to a trusted member of staff or outsource to an associate.

5. Offer discounts for prompt payment: If you have customers who continually pay late, consider offering a 2-4% discount for payment within, say, 14 days or for them to pay via Direct Debit. This is a much cheaper way of improving cash flow than obtaining a loan or using invoice discounting.

6. Protect yourself against bad debt: Regularly credit check existing and new potential clients. That new customer you may have just gained a large order from may be a slow payer or in financial difficulty. You could also obtain insurance for bad debt (credit insurance).

7. Understand your sales cycle: Familiarise yourself with the timescale and associated costs from point of order to deliver and being paid. I work with a client that ships product from China to the UK to resell, they often have to pay in full for the goods prior to the shipment leaving China. Managing their cash tied up in stock until it is turned into cash when sold and more importantly paid for in the UK can be a major challenge, even for growing businesses. In this instance, the company has 10 weeks of working capital tied up per shipping consignment.

8. Pay your suppliers on time: Maintain a good relationship with your suppliers, as you may need to request extended payment terms when money is tight.

9. Understand your tax liabilities: If your business is VAT registered, ensure you keep a tally each month of what VAT you owe. Likewise any corporation tax, PAYE or NIC that may be due. A good tip is to set up a second bank account and top this up each month with any surpluses to pay future VAT or tax.

10. Keep in touch with your bank: If your business is seasonal or you know you are going to have a couple of quiet months through the summer, then talk to your bank first. They will likely be more prepared to support you in the short term, particularly if they know you manage your business well by doing all of the above.

Finally...

Be resourceful. You don’t have to own all your assets, you could sell assets and rent and lease equipment (cars, vans, forklifts to even printers, photocopiers and office furniture). It is also possible to finance your stock. Whilst this may appear to be an extra cost, at least you don’t have your cash tied up and it may help you sleep at night. Staff cost are likely to be 50% of your fixed costs so consider outsourcing or using sub-contractors, as this may be more cash efficient and more flexible than having too many employees on your payroll through the quieter months. It is worth consider sacrificing a little bit of profit to be cash positive to survive those tougher periods.

Remember, Turnover is Vanity, Profit is Sanity but Cash is Reality!

If you are looking to grow your business, Business Doctors Cumbria offer a free business health check where we can help you to set a clear vision to understand the steps you need to take to fulfil your aspirations.

Contact Peter Fleming 0845 163 1490 or 07966 686112 or email peterfleming@businessdoctors.co.uk .

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