Managing Business Seasonality and the Cash-Flow Crunch

One of my favorite parts of what I do at LSQ is meeting with clients and prospective clients to learn more about the opportunities they have – and the challenges they face – in their businesses. It helps us create working capital solutions that truly meet their needs. And beyond that, everyone has an interesting story to tell.

While not new there is one concern that has been coming up more and more over the last few years across companies of all sizes and industries:

Seasonality.

While all businesses have their ups and downs in sales revenue, many industries have predictable “busy” times and “slow” times; think retail at Christmas or tax preparation firms in February, March, and early April for busy times with higher than usual sales and retail garden centers in January or a ski resort in July for slow times. That’s seasonality.

Seasonality requires a greater degree of planning and forecasting of cash to manage what equates to a mismatch between peak accounts payable obligations and accounts receivable revenue. That is, a company has to buy materials and inventory during the slow season to sell during the busy season.

Seasonality and the Supply Chain Dynamic

Traditionally, advantageous payment terms have been used as part of managing seasonality. A company buying raw materials and/or inventory could extend payment terms and their days payables outstanding (DPO) to offset having to buy those raw materials and/or inventory during times of slow sales.

That changed, however, during the pandemic.

Limited supplier resources and constrained shipping put pressure on companies’ ability to procure needed inputs. That flipped the dynamics of the supply chain in favor of the supplier. No longer were terms extensions or delayed payments part of the equation. Suppliers (and logistics providers) were demanding short terms (sometimes as soon as goods were shipped). Additionally, the limited availability meant prices went up for physical goods and for transport. Not exactly the best situation for a company in the middle of the valley of its yearly sales curve.

Moving out of the pandemic, companies selling physical goods didn’t get much relief; even though shipping rates went down, warehousing availability and cost became an issue. Again, not optimal.

Real World Examples

One of our supply chain finance clients actually implemented their supplier early-payment payment programs to handle seasonality. They are a large commercial grower that serviced major retail box stores. When COVID hit, many of their suppliers were requiring quicker payments.

“We have certain smaller and overseas suppliers that need their money upfront,” said the company’s president. “We buy containers and shipping racks, and things like that from China that have to be paid for on arrival. It definitely stretched our liquidity.”

Coincidentally, we have seen several clients that manufacture and distribute pet products facing the same issue. One company works with a number of smaller suppliers that need money soon to be able to serve the company’s demand, but has longer payment terms with their customers.

“We import a lot of different products, and the cash conversion cycle for that imported product is pretty lengthy,” said the company’s Vice President of Procurement. “When a product leaves the port in China, typically we have to pay for it, it’s on the water for a period of time, then it gets sold to one of our customers. They pay us on 60-90 day terms.”

In other words, an AR and AP timing mismatch due to seasonality that puts a strain on cash flow.

Solutions for Seasonal Cash Flow Concerns

As the VP mentioned, the problem is an extended cash conversion cycle: Money is out too long on the payables side and not coming in fast enough on the receivables side. Things have to be built up when sales are lowest.

So what’s the answer?

Well, the pet products company (with our help) figured it out. They implemented a hybrid accounts receivable and account payable finance (supply chain finance) program that gives them flexible working capital options. They have a line of credit they can access for their receivables to shorten their days sales outstanding. Additionally, they have a supply chain finance program that allows their suppliers to get paid quickly while they have flexible repayment terms with LSQ to allow them better manage their days payable outstanding. That’s a combination that allows them to shorten their cash conversion cycle and optimize their working capital – all without damaging their supplier relationships.

“We were looking for an alternative short-term solution that could help us through the crunch of where we were forecasting to be and allow us to pay our vendors early while maintaining working capital when we needed it,” the VP said. “Having it in one system (with LSQ) gives us the ability to pull multiple levers (both accounts receivable and payable finance) to meet whatever need arises.”

With rising interest rates and an uncertain economy, managing seasonality becomes trickier (not to mention the recovery from the financial challenges of a global pandemic) and shortening the cash conversion cycle becomes both more critical and difficult. But, while seasonality isn’t going anywhere – it’s not going to snow in many places in the Northern Hemisphere in July – innovative options are available for companies looking to better align their accounts receivable and payable cycles.

Photo via pexels.com.