Andrew Jackson, of Funding Circle, explains how to turn the problem of seasonality into an opportunity.
It’s far from the season to be jolly when revenue dries up and creditors threaten liquidation.
Some business owners are not frugal enough in the good times, and don’t reserve enough for the bad times, even though the bad times can be surprisingly regular. But when faced with the adverse effects of seasonality, business owners shouldn’t be full of doom and gloom – it’s a golden opportunity for reflection, consolidation, innovation and renewal.
We have all seen how winter blows a cold wind on more than just the high street. Construction projects freeze, marketing events grind to a halt, and unpaid debts start to snowball. Then spring brings the thaw, until the end of the tax year, when bad debts increase, as customers give up the ghost.
Having made it to May, the summer sees budgets tightening and less commitment to large projects. The heat slows down productivity, and skills and labour go on holiday. Autumn wakes up from the summer with a shock, compensating for when everyone was out of the office. New and hasty projects fail in the scurry to meet over-ambitious targets. Anxiety increases through November, because winter is about to return.
The earth’s elliptical orbit around the sun is not the only cause of cash flow issues for SME businesses. There are other regular and predictable adverse events that are also seasonal. Longer-term events include the uncertainty around the half-yearly budget and five-yearly national elections. Shorter-term events include paying salaries each month, and the date when major customers pay their invoices. These ebbs in cash flow are opportunities to plan and prepare to increase the overall performance of the business.
Turning a seasonal negative into a daily positive requires business owners first to recognise the impact of seasonality, second to accept rather than fight it, and third to embrace new ideas and new ways of working to overcome it.
Keep sufficient cash reserves
At its most obvious, managing cash flow throughout the year involves keeping sufficient cash reserves for salaries, tax, rent, purchasing, and keeping creditors at bay. Reserves should not be left slushing around a current account, but kept apart where there is a reasonable interest rate. While reserves must be accessible, they are strictly for limited purposes, and should not be used to bandage unforeseen problems that occasionally arise.
Be cautious during the good times
Windfalls need careful management. They should not coincide with frivolous or speculative spending. Where a business has dramatic peaks and troughs, cash needs to be carefully managed during the peaks, otherwise the business is exposed to a higher risk of employee fraud. Employee fraud usually comes to light during a trough when management review their numbers, and the impact can be toxic to a previously healthy business.
Sensible stock management
It is important to steadily build stock throughout the year to meet periods of high demand, especially if non-perishable stock takes time to make or import. Keeping purchased stock safe, secure and insured is key.
Savvy use of temporary labour
One of the biggest costs for most businesses is salaries. A good relationship with a contract recruiter and sensible use of temporary labour can ensure that a business succeeds in times of high demand, and becomes leaner during low demand. Recruitment and training can be a time thief and a sunk cost, but is also a way of identifying the talented staff to offer permanent roles.
Innovation is key to business success, particularly in the SME sector. Thinking laterally, creatively and adventurously is how businesses survive. Time and effort should be applied to developing alternative uses of premises, machinery, products and services. Renting out unused floor space, or discounting products to cover cost of old stock, may help. Even better is when the alternative use evolves into the primary use, and opens up a new untapped market or nascent industry.
Use slow times to review and develop
When business is slow, it's a good time for product development and systems review. Investment in intellectual property can reward the business with a product that is better suited to customer needs, and a system that is faster, better and cheaper to deal with periods of high demand.
Market the brand
It is also the time to market the brand, not the product. Staying in front of customers can help to familiarise them with the brand, so when the season ends (or begins) and they need to make purchasing decisions, there is only one business that springs to mind. Also, customer research can be a drain on resource, which is why permanent staff who are underutilised should be redeployed to carry out market research, develop new projects and generate new ideas.
Keep creditors in the loop
Even with the greatest prescience and preparation, businesses can still find themselves in financial difficulty and face a long period of drought ahead. In this situation, it’s key to have a strategy for getting through it.
The most important rule is to keep creditors in the loop. If payment plans are required, open and honest business cases need to be delivered. If the creditor understands the story and believes in the business owner, they can be kept on-side. The creditor wants to get paid in full, not see its customers become insolvent. Working with creditors can really help deal with the stresses and strains of seasonality, and forward planning may even integrate seasonality into the financing arrangements from the outset.
The only way to win against adverse seasonality is to recognise it, accept it, and embrace the opportunities that can be built out of it.
About the author
Andrew Jackson is head of collections and recoveries at Funding Circle.