Every summer, millions of us will put down our tools and find somewhere sunny for a well-earned break, but for small businesses, the summer holidays can cause a whole lot of stress. Staff are away, business is slow and revenue slows down. By the time everything is back up to speed, they often find themselves running short of cash.
After the long summer holidays, many businesses may be suffering from an unpleasant financial hangover. Here’s how to cure it, as told by PDQ Funding.
Bank holidays are expensive
Bank holidays can be expensive, although there is disagreement about exactly how big an impact they have. After all, each of these days is one in which businesses are shut, economic activity slows and fewer people are working.
A report from the Centre for Economics and Business Research suggested that each bank holiday costs the UK Economy approximately £1.9bn. Were the Government to scrap them, they could boost annual output by £19bn although it’s hard to imagine which party would willingly incur the wrath of the public by cutting the number of days they have off.
Other economists might dispute this. Although economic activity slows in some areas, it picks up in others such as tourism.
Equally, although businesses might be shutting down for a day, it doesn’t mean the work stops. How often have you found yourself working late before and after a holiday in order to pick up the slack? At the same time, employees who have been denied time off tend to be less happy and less productive, which means holidays are crucial.
Even so, the reality for many businesses is that business can slow down and, even if it does pick up later, things can still get tight.
A Yell Business survey of 1,500 small businesses found that almost all the bank holidays in a year could cost a small business around £2,250, as reported by is Is4profit.com.
For most small business owners, bank holidays are something which happens to other people, but that doesn’t mean you can control what your clients and partners do. Orders may dry up and it’s amazing how often you’ll find that the person dealing with the accounts who needs to sign off an invoice has taken a couple of weeks off.
The cash flow conundrum
All of this can become a very serious problem. Cash is the lifeblood of any business and if this dries up to an extent that you can’t meet your bills, it can be difficult to keep going even if orders and profits are otherwise in reasonably good shape. It only takes one unforeseen expense, or a delay with payments, to create a crisis. Poor cashflow is the reason around 80% of businesses fail.
So, this period of time immediately after can be a dangerous time. This is the point where a slow August or July might show on the books as few invoices reach their due date and income streams slow to a trickle. Equally, if your own team has been on holiday, they might be playing catch up which could leave all sorts of unforeseen gaps in your processes. Here are just a few examples:
Financial reports may be out of date
Depending on how regularly you compile your reports, your current figures may be inaccurate. This would leave you making financial decisions based on misleading information. You may find you have less money than you thought or have less coming in than you expected.
Invoices haven’t been chased
Late payment is a serious issue for all businesses. Your accounts team needs constant oversight over which invoices are due, which are late and which need to be chased. During the holidays it’s easy for this to slip.
If your customers are away, revenues may fall for the month. In many cases, they might make up for it with larger orders in September and October, but this could still leave you with a short-term cash shortfall.
The consequences of cash shortfalls
A short-term cash flow crisis can impact firms in many ways.
Reduced ability to invest
To grow, companies need to invest and expand. However, if you’re short of capital, you may have to postpone any plans, which could delay growth and put a halt on all your plans. In the run up to Christmas, many businesses may also need to invest for what could turn out to be the busiest time of the year, but if you can’t do that, it could compromise your efforts at the most critical juncture.
Postpone purchase of equipment
We live in an age of digital transformation in which new technology delivers all sorts of advances. New systems can open up new revenue opportunities, or streamline processes allowing you to get products to market faster and cheaper. Those which cannot invest, risk being left behind.
Reduced credit rating and buying power
If you’re forced to miss a bill, your credit rating will suffer. Customers will be less willing to offer favourable payment terms if you fail to meet an invoice deadline and you may find it increasingly difficult to access credit.
The nightmare scenario is that you find yourself unable to meet your financial commitments, in which case you could be looking at the end of the road.
Bridging the gap
The stakes, therefore, are pretty high, but there are ways companies can prepare for and solve any cash shortages.
Gain oversight of your finances
Financial reporting is crucial, but it’s an area in which many small businesses fall short. Technology allows you to compile instant reports which give you a real-time view of your true financial situation.
The better your reports, the easier it is to spot an impending cash flow crisis and make adjustments before it becomes critical.
Invoice management must be constant. At all times you need to know what’s coming in and how to chase it. If the person responsible is away for two weeks you need to make sure someone takes up the slack.
Find a temporary source of funding
A short term cash injection can be the perfect solution to a cash flow crisis. There are many options, but not all of them will be perfect for your business. We’ll discuss these in more detail below.
If a cash flow crisis really does look like it’s going to be unavoidable, your best bet may be to secure funding to see you through this period.
The most obvious is to look for a bank loan, but finance has become much harder to access over the past ten years. Banks have upped their lending requirements, will demand a crystal clean credit rating and will want to see a return. It’s a high bar to clear which is why business lending has been in the doldrums for a decade.
Alternative forms of financing
The growing difficulty of securing bank loans means many businesses are looking for alternative sources such as a merchant cash advance. This does not work in the same way as a loan because the provider is effectively advancing capital from your future invoices.
They will transfer a lump sum to you which is repaid as a percentage of your future credit or debit card receipts.
It has a number of advantages over loans including:
Faster and more accessible
While a loan application may take weeks or even months, this can just take a day. The money can be in your account much more quickly with a fraction of the paperwork.
Because this is an advance rather than a loan, the provider may be willing to work with you, even if your credit rating isn’t the greatest. That’s because they’re not lending against your credit history, but the strength of your business.
Repayments are based on a proportion of your future revenue. If it’s high, you will pay it off more quickly; if it’s low, you will pay less off making everything much more affordable.
When assessing your application, providers will look at your historic financial records. If they can see a clear pattern of consistent revenue, they will be comfortable advancing a higher sum, especially if they see consistent a seasonal pattern.
For example, if they see that business always drops off in August, but picks up in September and October, they will feel fairly confident of seeing their money come back.
Making the right choice
A merchant cash advance may not be the right choice in every circumstance, but it can be a useful and accessible way to bridge a cash flow shortage and puts you in a stronger position to take your business forward in the future. You should take a little time to think about your options, ensure you have an adequate repayment plan in place and decide which funding option will best help you to meet your goals.
More on taking time out and managing your finances.
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