Solving Seasonal Cash Flow
It is one of the classic challenges of any seasonal business, a big cash surplus (hopefully) followed by a drought (potentially) with funding required at the low point in that cycle, which as we all know is the worst possible time to try and borrow.
Many businesses see borrowing as a necessary evil, especially when it comes to financing cash flow. Cash flow is after all not the most exciting thing, it doesn’t get the juices flowing like some exciting new piece of kit or that recently won new contract. I can understand why for many firms cash flow is something you finance when you need to, rather than in case you should ever need to.
Seasonality exists in nearly every business, not just Christmas tree traders or ice cream vans. If you ask any business owner they will tell you that at different points in the year they are busier or quieter.
The big mistake that most SMEs make is to seek finance when they need it, sadly when you need to borrow for cash flow is generally the worst possible time to do so.
The Crystal Ball
Like financing cash flow, forecasting is another less exciting part of running a business. Every good accountant or business coach will encourage you to forecast both your cash flow and P&L. For me, forecasts don’t always need to be about the money. Most SMEs will understand their own KPIs, if the SME can forecast based on KPIs then the accountant can add the figures.
Your KPIs will show when you are likely to need to raise finance to fund your cash flow. They will also show when you are at your peak and therein lies the secret to solving seasonal cash flow.
Borrow Because You Don’t Need It
Most mainstream banks operate a system of judging whether they will lend to you based on how your current account operates. The algorithms are a little more complex than that but if your current account is in order and runs within it’s limit then you are likely to get a warm reception. The surprising thing is that many of these algorithm systems recalculate at least monthly, this means that when you are trading at your peak you are several times more likely to obtain the finance you want.
The key is to borrow when at your peak then keep the facility open or keep the cash in reserve. Borrow when at your most creditworthy then keep it in your back pocket.
You can always ask the lender to agree a facility then ask them to keep the offer open for a longer period. Just because the offer says it is only valid for 28 days doesn’t mean you can’t negotiate, you often can get this offer period extended.
There are loads of options for financing cash flow and every business has different needs, I know funding cash flow isn’t exciting but getting it sorted makes your business stronger when your competitors are at their lowest.
If you want to know your cash flow funding options then am always happy to talk.
By Dave Farmer