SMEs feel strain on working capital during summer months

Many businesses thrive on the peak of Summer sales, for others these are the months when business dips due to school holidays and families jetting off to make the most of the sun. The challenge with the decline in revenue is the effect this has on cash flow and working capital. This is the time when SMEs need to be extra cautious with the management of their finances.

Dip during the holiday season

SMEs are more likely to seek extra funding during the month of July than at other times of the year, apart from October being the highest month in the year, research by Hitachi Capital Invoice Finance has found.

The summer holiday season marks a time in the year when many SMEs are feeling the strain due to a depleted workforce, inevitably this will result in reduced productivity and business performance. We can see the start of Euros marking the start of the summer season as staff members start to take time off to enjoy the sun and football. Trading activity might slow down with invoice payments taking longer than usual to clear, particularly if key people are away. Because of this, the results shows SMEs are more likely to seek cash flow finance during these months.

Cash is needed throughout the year to pay for outgoings such as inventory, operational overheads, salaries and suppliers. For those that experience a noticeable dip over Summer, this could have detrimental effects on working capital potentially leading to cash flow difficulties.  This means they may be tempted to dip into cash reserves saved later on for the post-Christmas dip in January or their tax returns, potentially pushing the problem further down the line.

Summer strain

Ways to alleviate pressure on cash flow

  • Include the dip in sales into your financial forecasts for the year ahead – if you know your business tends to experience a drop in sales in July then plan this dip into your trading activity. You should be able to forecast how much revenue you expect to be coming in and how much costs to be going out, making sure your revenue covers your outgoings.
  • Offer seasonal incentives – Push your promotion of products and services during the summer months to entice people to purchase from you in a period they usually wouldn’t. Offer them a benefit of taking this action and let them know that you have this offer on in advance of summer so they can plan their business purchases.
  • Seek flexible forms of financial support – If your business’ financials tend to struggle over the summer months, find forms of finance support that won’t affect your cash flow in the future. Pre-plan with your bank to extend your overdraft so you won’t be paying unnecessary charges when you run low on cash. Consider using short term forms of finance such as invoice finance to improve your company’s working capital and cash flow ahead of the summer season.

Rise to the challenge of the summer months if your business is one that is affected by the dip. Take time to sit down and plan how big the dip is and what this effect will be on your business. There are steps you can take to minimise the impact it will have on your working capital and cash flow. You can even consider hiring someone who knows their finances well such a finance manager or external help such as accountants to help you pre-empt the year ahead.

Experian’s ledger manager tool helps you manage your business’ cash flow. We know that collecting payments from your customers on time is one of the biggest challenges face by SMEs all year around. The software takes your sales ledger data and combines it with our credit information to help you prioritise your credit control and payment collections. Click here to find out more and see a demo of how the product works.

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Posted on by Cindy Yip

Estimated read time: 4 mins