Planning is at the heart of every business’s success. As specialist business advisers, we have seen many companies fall short of financial targets and into distress. Across East Anglia, there were 245 insolvencies recorded by the Insolvency Service during the first half of 2019 alone. This is often the result of poor planning and budget management. There are many factors that can impact cashflow, from periods of economic uncertainty through to the seasonality of your business, so forecasting and good money management are essential to ensure your business sees the year through.
The summer months and Christmas are both times of the year that will most certainly have an impact on your working capital requirements. For example, during the warmer months, many local companies operating in the retail, hospitality and leisure sector may have struggled to make the most of the opportunity if they did not have appropriate plans in place to deal with the increased custom that summer can bring. While busy periods can help bring in cash, businesses need to be prepared to make the most of the opportunity, and this means pre-ordering enough stock in anticipation of increased demand. Without this, a company is unable to make the most of the opportunities summer can bring.
And, while our region remains buoyant compared to the UK as a whole, I have advised a number of manufacturing, construction, wholesale, retail and repair companies that are showing signs of distress in recent months. It has been a reminder that now, as we go ‘back to school’, is the right time to draw some learnings from the summer months that have passed us by, in order to become stronger for the busy winter period that is just around the corner.
We have seen several businesses across Essex stockpile more than usual for this time of year. This is perhaps due to the ongoing economic uncertainty as we head towards our departure from the EU, and while it’s important to ensure you have enough stock to cope with busier periods, particularly if you are a retail outlet or restaurant, be sure to still be strategic when placing orders. This goes for the manufacturers, too, as we continue to see large, corporate companies scale up their inventories as they anticipate gridlocked borders.
For all companies, this method should be approached with caution. Often, having too much stock and not enough demand, even through busy summer or winter months, can impede growth and dent daily cash flow. As a rule, management teams should stock for no more than 3-6 months in advance and still allow headroom for growth.
To build a stronger work flow, companies should also consider expanding their product range or service lines into other markets and sectors. For example, consider targeting other national events or holidays to widen the breadth of your offer to increase and diversify your customer base. With a wider audience, you are more likely to drive sales consistently throughout the year, which will support the cash flow needs of your business.
But, like with all business endeavours, management teams should complete a thorough due diligence before committing to launching a new product or moving into a new sector. Understanding how the market works, customer demand and how your current financial situation and forecast will accommodate the activity, is key to ensuring you don’t fall short at the first hurdle.
Cash flow pressures are almost inevitable when it comes to seasonal businesses. But there are measures firms can take in advance to mitigate these challenges. Pre-empt and map out the pressure points that could impact your ability to fulfil a contract or cause a delay in payments. This will help to alleviate any potential pinch points.
Changes in cash flow can put strains on firms of all sizes, but particularly SMEs. If too much working capital is tied up in the day-to-day costs of running a company, it makes it difficult for management teams to source and act upon new business opportunities.
For some small companies, it may be easy to become contract-happy and overpromise work to clients. The first issue is that you may not have the resource to be able to fulfil this in the first place. The second is that some payment terms can be up to 90-days long. This can put a significant strain on cash flow as it takes such a long period to be paid for the product or service you have sold.
If you are unsure if you will be able to manage such payment terms, many banks now also have a cash flow calculator service that firms can use for free online. This can give businesses a better grasp on how to manage capital during a trading cycle and provide a clear view of payment timelines from the time an order is placed, through to production and completion.
In some cases, companies may need to rely on more than what they have in the bank. Financial directors should be open and transparent with business advisers and bank managers. This means that if there is cause for concern, funding options can be put in place to sustain cash flow and ensure supplier payments and wages are met, which is not only a functional but legal requirement.
Now is the time to review what has and hasn’t worked well for your business during the summer months. Review and apply your learnings ahead of the busy Christmas season and, for some businesses, the lull in-between.
Monitoring annual trends, and understanding how forecasts play out against actuals, is vital to ensure you create robust plans. Having a solid foundation in place will help to put a business in the best possible position to navigate challenges and take advantage of new opportunities that arise each year. My top tips for annual planning are: