Tax & admin · 29 January 2018

How to avoid cash flow peaks and troughs as a small business owner

Effective forecasting can smooth out cash flow peaks and troughs

Continuing his latest Business Advice series, Grid Law founder David Walker identifies two scenarios which could disrupt a small firm’s cash flow.

It’s natural for your cash flow to fluctuate throughout the year. We all have busy times and quieter periods, but if we’re not careful, these quiet times can put such a strain on cash flow that it can take months to recover. In extreme situations, it can be the final straw that forces a business to close.

However, the good news is, it doesn’t have to be this way. With a little thought and forward planning, you can smooth out the peaks and troughs in your cash flow.

Holiday seasons, whether it’s Christmas or the summer, are prime examples of times when your cash flow can be put under increased pressure. So, in this article, we’re going to look at two situations where you need to be especially careful to avoid a cash flow crisis.

  1. Sales promotions

When you think of a sale, most people will think “discount” or “buy one, get one free” type offers that are normally associated with a retail business. However, if you provide a service you may also offer a discount or some other sales incentive, so this advice is just as applicable to you.

Sales promotions can lead to problems when they haven’t been properly planned or a business owner thinks they must have a sale just because their competitors do.

You don’t. Before offering any sort of discount, incentive or promotion, you must ask yourself why you’re doing this and whether it’s the best strategy for your business.

So why might you want to hold a sale?

If you’re a retail business, you might want to clear out old stock to make way for the new. This is a good reason to offer a discount because old stock takes up valuable space.  If it’s out of season or if fashions are likely to change for next season, you don’t want to hang on to this stock because it represents cash that is tied up and cannot be used for other things.

If your products are not seasonal or not likely to go out of fashion, think carefully before discounting them, or discounting them too much.

If you offer discounts on non-seasonal items and especially if you hold regular sales you could effectively train your clients to wait for the next discount to come along. If they don’t need a high-ticket item straight away, they will just hang on until your next discount day before making their purchase and save themselves a significant amount in the process.

Don’t let your business fall into the same trap. If you discount your products or services too much, your customers may become sceptical about the original price and think it’s too high when the sale ends.

If the holiday season is traditionally a quiet period for you, you might consider offering some sort of incentive to avoid a dip in trade. But is this a good idea?

Cutting margins too far or even selling at a loss just to generate turnover, you could create a longer-term problem. By adopting this strategy, you may find you have to work even harder during the busy times just to make up the shortfall.

If you do have a seasonal business, you may be better off accepting this and plan in advance for the quiet times. For example, you could focus on saving costs during quieter times or use the holiday season to negotiate better deals on any purchases you need to make.

Catch up on the rest of David’s cash flow series:

  1. Late payments

Late payments can be a problem at any time of the year but the holiday season can provide clients with a convenient excuse for delaying payments even further.

How many times have you heard the excuse: “Sorry, the person who authorises payments is away on holiday at the moment.”?

It happens all the time, so you need to prepare for it.

If you hear this excuse, you need to establish how long they’re going to be away. If it’s just a short-term absence, you can clarify that there are no other issues preventing payment from being made and that payment will be made as soon as they return.

No business should be left without someone in complete control for very long.  So, if the person responsible for making the payment is going to be away for any longer than a week, someone else should be available to deal with this in their absence.

If they cannot physically make the payment (which would be rare), they should at least be able to make a commitment to the payment being made on a specific date when the authorised person returns.

During the holiday season, you also need to be careful not to let your own credit control procedures slip or this will cause avoidable delays in you being paid.

If you know your credit controller is going to be away, plan in advance so somebody else can follow up on any overdue invoices in their absence.

The key to surviving the holiday season, or any quiet period, and not suffering a cash flow crisis is to plan in advance. A great tool to help with your planning is a 13-week cash flow forecast. I will explain how to create a cash flow forecast in my next article.

In the meantime, if you would like any help or advice with any cash flow or other legal matters, please feel free to email me at editors@businessadvice.co.uk and I’ll be happy to help.

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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