By Daniel Williams – South West area director for Global Transaction Banking, SME at Lloyds Bank Commercial Banking.
For many, it’s the most wonderful time of the year, but for businesses, Christmas can put enormous pressures on a firm’s cash flow.
The surge in demand for products and services during the festive period can make it increasingly difficult for firms to fund the extra stock, raw materials and staff needed to get through the holiday season. Meanwhile, with payments often even slower during the festive period, businesses can find their cash flow squeezed at both ends.
On top of this, Black Friday and Cyber Monday mean consumers are now planning their Christmas spending well ahead of December, meaning retailers have to get any inventory ready earlier, and have longer cash cycles for a longer period of time.
This makes keeping on top of cash flow increasingly difficult, particularly when the festivities and New Year’s sales rush dies down.
For small to medium-sized enterprises, particularly those in the retail or hospitality sectors, it’s vital that they have the working capital – the amount of money needed to cover day-to-day costs – to make it through the prolonged run up to Christmas.
We already know that businesses were under increasing pressure to manage their working capital even before the Christmas rush began.
Our most recent Working Capital Index report found that UK businesses have more than £535bn tied up in excess working capital, the day-to-day costs of running a business.
Every pound that is tied up in working capital is a pound that cannot be used to invest back into the business, therefore having the procedures in place to manage this is vital ahead of the holiday season.
So how can businesses prepare their working capital for the festive period?
Forward planning is essential
On top of the demand to manage higher inventory levels and employ more staff during the Christmas holidays, payment delays can also be inevitable. With offices closing and more people taking time off from work than usual, customers’ payment times can also be longer. This can put a real strain on sometimes already stretched finances.
In these periods it is always best to get advice from a trusted advisor and look at your cash flow situation in detail. The Lloyds Bank’s working capital management tool can help you to delve into your business’s finances and cash flow pinch points. It allows our relationship managers to analyse the working capital cycles of their clients’ businesses and identify financial opportunities and challenges.
Know what funding options are available to you
There are a number funding options available to businesses to make sure that a sudden spike in demand or pause in payments doesn’t have a detrimental impact on cash flow.
Invoice finance and asset-based lending, for example, can be valuable finance solutions for businesses that need to access cash quickly and flexibly.
Invoice finance allows firms to access up to 90 per cent of the value of an invoice within 24 hours of it being issued. The lending amount increases with the value and number of invoices your business sends, allowing your business extra cash to manage increased seasonal demand. This also guarantees that funding will be available if a third party has taken time off for the Christmas holidays, for example.
Asset-based lending allows businesses that have capital tied up in existing, stock, plant and machinery or property to use these assets to access further capital in addition to an Invoice Discounting facility. Money can be released from these assets into the business, which can then be used to buy more stock/materials.
If unsure, seek advice
For businesses, Christmas is a time where profits can increase significantly if enough preparation is done beforehand to manage working capital. But if you have any doubts about how to maintain a healthy cash flow over the festive period, speak to a trusted adviser.
They can ensure that you take the opportunities that Christmas brings without potentially damaging cash flow, allowing you to focus on having the right products and prices to appeal to customers, rather than on the finances they need to project their working capital.