Daniel Brady who runs Heavenly Hammocks knows all about the swings and roundabouts of managing cash flow in a seasonal business. Demand for his product is heightened in summer, but in winter few people think about swinging in a hammock, sipping a cool drink and reading a book.
Nevertheless he has to invest during the downtimes to ensure he has enough product for the summer months. This balance has required a novel approach to cash flow management.
“Our lead time for manufacturing is three to six months, and we need the orders to arrive by the start of the high season. We're normally ordering right at the start of the low season. Just as our revenue starts to reach its low point, we need to invest in inventory for the next 12 months,” says Brady.
“In the past year, we've grown by 150 per cent and we're expanding the range further. So this winter we had to invest a large amount in inventory in advance of summer, going into debt for this,” he adds.
This seasonality, combined with growth and inventory investment, has meant Heavenly Hammocks’ business was cash flow negative over the past six months. But Brady expects all debt to be extinguished by Christmas.
“Once we stop growing so fast, the business will finally become consistently cash flow positive. It’s unlikely the 150 per cent growth rate will continue, since we have now achieved a reasonably high market share,” Brady says.
Because he runs a high-growth business, Brady is able to manage a lumpy cash flow cycle. But for other businesses whose revenue rises and falls during the year, a more stringent approach may be required.
According to Kate Blecich, Director Business Advisory at accounting firm HLB Mann Judd, offering discounts is one way to smooth out revenue.
“Discounting during off-peak seasons or for up-front payments can support cash flow through those hard months,” says Blecich.
“When you set out your business plan don’t assume each month is equal, consider the timing of payments. Put in place mechanisms such as package offers to ensure you're still getting cash flow at those times,” she advises.
Explore all options
While seasonality may be just part of the business cycle, many CFOs still struggle to protect their business in light of it.
Vince Dimasi, Director and Australian lead of KPMG’s working capital advisory practice, says the key to managing a seasonal business is making sure working capital is optimised throughout the year, to provide surplus funds when cash is tight.
“This insulates the business and provides surplus cash and working capital that can be used to take advantage of opportunities. If you think of, say, a wine business, being able to buy more grapes at spot prices if a deal presents itself is a positive of seasonality.
“But you need to have the cash and facilities to do that. This also gives the business more funds to pay down debt throughout the year and fund growth. The better players are looking much more holistically at their working capital to find and unlock value,” he says.
Dimasi advises unpacking the three operational working capital cycles: order to cash; purchase to pay; and forecast to fulfil, which in lay terminology is receivables, payables, and inventory.
“The reason for this subtle distinction in the language is because it really looks at the whole end-to-end spectrum of operational practices. The best companies are starting to look critically at each of those different steps and to unlock value caught up at each point,” he adds.
This involves a deep understanding of the people, processes and systems that contribute to the speed cash flows through those key operating working capital cycles.
Then it’s important to look into what the business is currently doing, then re-build practices with a view to global best practice.
Work in progress
Dimasi says when it comes to businesses that are doing a great job of seasonal cash flow management, telcos are good examples to examine.
“They operate in such a highly competitive market. What you're seeing is lots of initiatives to adjust billing cycles, customer terms and prepayment amounts on contracts so they’re getting cash in quicker. Other parts of commerce are starting to wake up to that, looking at how they can apply some of those pre-billing techniques or faster invoicing cycle times to their business,” he says.
“Smart operators are looking at other industries to see what global best practice looks like, and thinking about how they can apply those techniques to their business, even though they may be in a totally unrelated industry.”
Businesses whose cash flow is affected by seasonality could also benefit from greater visibility into historical cash flow, enhanced forecasting tools, and a critical look at their working capital to help free up cash.
By being vigilant year-round, the business will be better set up to survive when cash flow is tight, as well as invest for growth when cash is more abundant.
- Work out strategies to drive cash flow when funds are tight:
- Discounts in the off-season
- Discounts for early payments
- Package discounts.
- Look at every stage of the cash flow cycle: receivables, payables and inventory.
- Don’t assume equal cash flow for every month, but instead work out the months when cash is plenty and when it is scarcer, and plan accordingly.