Don’t take your eye off working capital management this summer

Managing cash flow
Managing cash flow

Small and medium-sized businesses must not take their eye off the ball when it comes to managing working capital through the summer season, when resources often become stretched.

Client data1 sourced by Hitachi Capital Invoice Finance has revealed that SMEs are more likely to seek additional funding during the month of July than at most other times of the year. In fact, demand for extra funding only exceeds the levels seen during the summer peak in one other month of the year - October.

The summer holiday season is a time when many SMEs are feeling the strain due to a depleted workforce and this can have a detrimental effect on productivity and business performance. Trading activity might slow down and invoice payments might take longer than usual to materialise, particularly if key people are away on holiday. To help bridge the funding gap, our data shows that SMEs are more likely to seek cash flow finance.

SMEs need to have access to cash throughout the year to pay for inventory and other operational overheads such as salary costs and supplier invoices. If income levels dips during the summer months, this can directly impact on working capital and potentially lead to cash-flow difficulties later in the year.

If SMEs have failed to keep a close eye on working capital management throughout the year, they may be tempted to dip into cash reserves that have been set aside to pay their tax return when it becomes due at the end of January each year. This is never a wise thing to do and is simply storing up cash flow problems for the future.

To avoid this, businesses may need to take preventative action by seeking a flexible form of financial support, such as invoice finance, ahead of the start of the summer season.

There are other things that businesses can do to alleviate pressure on cash flow during the summer season. Improved business forecasting, for example, could enable the business to plan ahead for any dip in trading activity and it may also be wise to delay non-essential expenditure during periods when cash flow is more likely to come under pressure. If necessary, seasonal incentives could also be offered to encourage debtors to make prompt payments.

By planning ahead carefully and taking a creative approach to working capital management, there is much that SMEs can do to avoid getting into cash flow difficulties over the summer season. As well as taking this action, SMEs should consider putting in place a finance partner who understands how cash flow problems arise and how to deal with them.

John Atkinson, managing director at Hitachi Capital Invoice Finance

1 The data sourced by Hitachi Capital Invoice Finance indicates the total number of clients seeking additional funding on a month-by-month basis during 2014 and 2015.