If your business had exactly the same revenues and costs each month, managing cash flow would be easy. Of course this is never the case, and the fact sales tend to spike at certain times of year and dip during others is a major cause of working capital pressures for small and medium-sized businesses.
Many sectors of business experience seasonal fluctuations of one kind or another. The broader hospitality and tourism sectors are perhaps the best known examples, and that has a knock-effect to many other B2B sectors such as food and beverage; manufacturers and wholesalers, to name but a few.
Other SMEs experience more subtle forms of seasonal demand – related to the weather, Christmas shopping season, or the availability of specific supplies etc.
Why Seasonal Demand Causes Cash Flow Problems
While sales fluctuate, many costs remain fixed. However, covering the bills during quiet times isn’t usually what causes a cash flow problem – instead, it is the need to meet a spike in demand, and the resultant increase in labour and supply costs, that puts a strain on many a business’ bank account.
The problem is that your staff and suppliers will want to be paid at the end of the month, but if you’re a B2B firm, your clients often expect 45 to 60 days to pay you. This means that every year, you have to invest extra working capital to meet demand in your peak months.
Changes in sales levels, whether regular or unexpected, cause real cash flow difficulties for many businesses, big and small. If you can’t find a way to smooth your output out over the year – and clearly not all businesses can – you will have to find a way of financing the necessary investment to meet peaks in demand.
Invoice Finance Helps With Managing Cash Flow
Many SMEs faced with seasonal fluctuations in demand use a business loan or a business overdraft to meet the up-front costs associated with increasing production or output. However, these can be expensive; unnecessarily complicated and have fixed terms with fixed principal and interest repayments, regardless of the ability for the business to repay, month in and month out. Plus, business overdrafts and business loans are not available to every business.
The biggest problem with a business loan is that if you get one, you have to pay interest related to the highest amount of capital that you need, for the full term of the loan. This is the case even when you only need the money for a short period every year.
Invoice Finance or Debtor Finance as its often referred to, is a real alternative to a business loan for most B2B operations. It is particularly suited to situations where revenues vary as well as for good growing businesses. Invoice Finance is primarily designed to mitigate the negative impact on cash flow, sustained by these fluctuations or high growth months, by bringing forward the payments clients so that you receive them in 24/48 hours of issuing the invoice, which in turn will eventually make for bigger orders and hence a bigger end business.
With flexible invoice finance, you only pay for the invoices you chose to put up for early payment. This means that you are not paying interest all year just to raise a certain amount at certain times of the year. Instead, the amount you can raise at any one time is directly linked to your latest sales, and will be cleared as soon as your clients pay the invoice/s you have issued to them. This makes for smoother cash flow and always raises an amount relevant to your latest sales orders, whilst also being very cost effective, in fact in most instances Invoice Finance is far cheaper than taking out a non-bank loan.
Supply Chain Finance
For those wanting an even earlier cash flow advantage as you ramp up for a seasonal spike in demand, supply chain finance can provide it.
Supply chain finance works by paying your suppliers early, say 24-48 hours after delivery of your orders; so that you can take advantage of early payment/settlement discounts, whilst giving you the 30-90 days to pay for your supplies.
At OptiPay, we are experts at both Invoice Discounting or Invoice Finance and Supply Chain Funding. As an established funder to well over 350 businesses across Australia, with a user-friendly online technology platform, we can help you build a tailored package that will cover all your working capital requirements during seasonal changes in demand.
