Seasonality & Financing Seasonal Trends

Seasonality & Financing Seasonal Trends The fact is that almost every business is seasonal in some way, there are largely predictable periods of high and low, busy and quiet. The strange part is there is very little research around the impact of seasonality, there is even less around how businesses should be contingency planning and […]

April 13th, 2019

Seasonality & Financing Seasonal Trends

The fact is that almost every business is seasonal in some way, there are largely predictable periods of high and low, busy and quiet.

The strange part is there is very little research around the impact of seasonality, there is even less around how businesses should be contingency planning and financing seasonality.

A study by the Univesity or Southern Maine for The Small Business Institute describe the impact of seasonality;

Small businesses face major problems related to annual cycles of demand. These cycles of seasonal fluctuations may lead to slow or lost sales, unpredictable business conditions, and cash flow problems which in turn are major obstacles for small business… The swings in sales and business operations resulting from seasonality affect both small business profits… with potential implications for small business viability.

In short, seasonal trends are a problem for the smaller business. What we fail to see is a pragmatic and planned approach to financing these trends.

When Seasonal Trends Peak

There is no set period of peaks and troughs. Ask an accountant and they will tell you that January is their busiest month. For us, August and December are quieter, for retailers August and December can be their peak trading periods.

That said, there is some commonality;

This graph shows the results of a survey of US businesses. The terminology is American (shoulder up – positive outlook, shoulder down – negative outlook) but the numbers still apply. It shows were the most common peak and low periods exist.

In a more visual form these periods are;

These timings are important and I will come back to them later.

Financing Trends

The challenge for many companies is in balancing the different pressures and financing the gap. The impacts of seasonality are described by The Univesity or Southern Maine report as;

..the swings in sales and business operations inherent in seasonality may give rise to slow or lost sales, unpredictability of business conditions, and cash flow problems, affecting small business profits and… employment picture

If we take lost sales and employment as the following impacts any business needs to act to avoid at all costs then there needs to be a mitigant in place to make that happen. The challenge is to avoid losing sales, retain staff and keep the income moving. Doing this in a period where cash is tight means having spare cash.

At a time where cash is tight and cash is needed then the only real options are to seek to increase the capital by new injection or by financing.

Why Seasonal Financing Fails

A point I commonly make is that many companies seek to raise finance at the worst time for them. When it comes to cash flow too many companies will seek to finance cash flow when cash flow needs financing. The problem with that is your business is the least creditworthy at the time you want to borrow. Think of it as trying to borrow when;

Sales are down
Costs to sales ratio is rising
Existing overdraft facilities are being more heavily used
Finance is becoming time critical

It doesn’t build a great picture and doesn’t ‘sell’ your business to a lender.

This has two main impacts;

The lender declines and you cannot access the finance you need
You can access the finance but it costs you more, is typically for a shorter period and you have little on your side to negotiate a better deal

The big thing is that all this can be avoided by thinking ahead.

Seasonality has some advantages. It generally happens every year at the same time. The means that planning for it shouldn’t require a degree and doesn’t need a complex cash flow forecast to predict. That said, too many companies still fail to plan for seasonal trends.

I often say that the best time to borrow is when you least need it. If you look at the accounts for Apple Inc (they are published by Nasdaq) you will see a cash-rich company that also borrows. Whilst Apple is a world away from your average small business the same theories still apply, that borrowing when you don’t need to is easier, cheaper and you have far more options. Successful companies will borrow to increase their viability and grow, not just because they have to.

With this in mind, your average small business is looking it’s most attractive to lenders after it’s best trading period. At this point in time the company can;

Show a positive trend in the year to date financials
Show low use of overdraft facilities
Show greater cash within the business
Show a lender that the business thinks ahead and plans which is always something lenders want to see
Because you have no time pressure to borrow you can negotiate your terms

At this point in time, things are in your favour.

You need to consider that it is easier to obtain an offer of finance then sit on it until you need it than it is to ask for borrowing when it is required. Once finance has been approved you have a precedent set that that lender wants your business, it is the better place to be.

With that in mind then if we look at the busy periods as;

Then the best time for businesses to seek finance for their low period would be September and October, being the point in time when the financials and cash reserves are likely to be at their peak. Experience says that most companies will wait until they need the cash before seeking finance, at which point the need for finance is at it’s greatest, the financials are starting to show a downturn and cash reserves are becoming strained.

If finance is going to be sought in September then it is worth considering your best options in July & August. This approach may seem alien to some businesses, it is seeking finance when it is not required however, this is exactly the point being made.

Sourcing your finance options when you don’t need the money gives the best options, widest choice and the best terms.

By Dave Farmer

The information and quotes within this post contain the following references:

Reference: Kaufman, 2012; National Federation of Independent Businesses, 2004. Koenig & Bischoff, 2005. Small Business Institute Journal 2013, Vol. 9, No. 1, 37-50. Jeffrey Shields, University of Southern Maine. Joyce Shelleman, University of Southern Maine. Koenig & Bischoff, 2005; Spencer & Holecek, 2007

David Farmer

Over 30 years finance experience. Former credit underwriter, founder of Lime Finance Solutions in 2012. Multi Award winning business, featured in Sunday Telegraph, Parliamentary Review, Sky TV and others. Regular contributor to press and business associations. FCA Authorised, ALIBF Qualified. Specialist in Commercial Mortgages, Business Lending, Property and Development Finance.