Whatever the time of the year, seasonality can prove difficult for cash flow. To avoid these cash flow pressures, seasonal cash flow forecasts are a must but can be the more difficult projections to prepare.
It may be prudent to take stock on what impact current economic factors have on business cash flow. For many businesses in the manufacturing and trade industries, the Christmas / New Year period may be a time where they go back to a skeleton staff. These businesses may in fact close for a period of time. This is in stark contrast to the retail sector where activity reaches high points at this time of the year. Other industries, like mining service providers, are forced to diversify to survive. For other business sectors such as tourism or agriculture, organisations are subject to peak periods of activity followed by troughs.
Either way, these situations give rise to cash flow pressures that need to be managed.
Cash Flow Pressure as the Business Winds Up or Down
Take Christmas time for example. You may be shutting down and having a well-earned break. Of course, if you are scaling back to minimal staff, this will have some obvious impacts on cash flow. The key question in this situation is:
What will the impact be of reduced or no sales over the Christmas / New Year period be?
Will there be enough money in the bank in mid-December to cover all of the expenses over January that will continue to occur? The outflows need to cover expenses such as increased staff wages to include holiday pay. Other overheads such as property rent, loan repayments and possibly increased personal drawings don’t just stop for the holiday season.
For those businesses that are leading up to a peak period, you may well have the same problem, but at the opposite end of the time-frame. For many seasonal businesses in tourism and retail there is a swag of outgoings to consider so as to manage this seasonal cash flow dilemma.
Things like new staff may have to be employed, additional stock may have to be bought, an increase in marketing and advertising expenses may add to the costs.
In this case, the business may have some short-term cash flow pressure. This may be around the start of the season as it may take some time for the revenue to catch up to the additional expenses that are being incurred.
Identify Seasonal Cash Flow by Analysing the Past
In either scenario, a good understanding of the current cash flow pressures, and some short-term modelling over the next three to six months is a good starting point.
A logical place to start is to look at what has happened in previous years. What was the previous seasonal cash flow impact. This will help you identify the trends of the cash flow pressures. Here it’s a good start to look at the impact on various ledger accounts. You can then then used these as a base line for your seasonal cash flow forecast.
After that, consider if the income or expenses recorded last year was considerably higher or lower than the previous years. For example, you may elect to increase income for this period by 10% on the prior year, based on an increased revenue base or market share. Or, you may elect to increase overhead expenses, based on an inflation rate of 3%. This may be a very simplistic approach, but in many cases, this is enough to plot out where the cash flow pressures are going to be.
Fine Tune and Revise
It pays though, to not just take a blanket approach. Other obvious changes may also be able to be identified relatively easily. If staff numbers have decreased or increased from the prior year, then this can easily be modelled out accordingly. Use the expected periodic wage payments as your base here. Don’t forget that this then has an obvious flow-on effect on on-costs such as superannuation or pension fund expenses. So make sure to adjust these as well.
Here is another example that paints the picture of how seasonal cash flow is impacted. You may have a particular product line that is has seasonal popularity. In this case, you may require more stock to be purchased leading up to the peak season. Or maybe there has been a change in occupancy expenses if the business has moved premises over the last year. Have your financing and interest expenses changed due to additional or reduced borrowings from the previous year?
These are all important questions to ask in order to fine tune the short-term profit and loss budget.
Don’t Forget the Balance Sheet
The short-term profit and loss budget will only address part of the cash flow equation. Balance sheet movements also need to be considered. Once again, prior year movements over the same period can be used as a starting point. Now you need to consider the changes that may have occurred over the previous twelve months.
Has the business entered into chattel mortgage or hire purchases agreements? Is there a debt owed to the tax man for outstanding GST/VAT or pension fund liabilities? Is there maybe even a periodic repayment schedule?
Are you expecting to take more personal drawings out of the business because the you have plans for an overseas family holiday?
Seasonal Cash Flow in Summary
In many instances, these can be the things that cause cash flow pain over these peak times and take businesses by surprise. The profit forecast may be better than the prior year but failing to take into account increased demands on cash reserves so the impact on the cash position can be significant.
Utilising tools such as Calxa which seamlessly integrates with mainstream accounting packages will enable businesses to quickly populate 3-way forecasts to get the true picture. Reviewing and planning for this now will not only put businesses on the front foot. More importantly, it will ensure there are no nasty surprises waiting around the corner.
A meeting with the bank manager now to establish a short-term overdraft facility may be a consideration to ensure that the day-to-day operations of the business are not affected.
Or, it may just mean that the overseas family holiday is postponed until next year. Either way, being informed and prepared will ensure that the summer silly season is survived by one and all.
This article was first published in the December 2015 ICB Newsletter.