Written by Steven Uster, Co-Founder & CEO of FundThrough
Our high season here in the Muskoka region lasts only as long as the weather permits. Typically, it spans from the Victoria Day weekend to Thanksgiving, with the real action happening while the kids are out of school.
Those early weeks in May and June can be slow going for seasonal businesses, yet the demand for free cash flow is high.
Service-based businesses need to re-open or expand offices, hire and train staff, and purchase supplies. Construction contractors race to fund permits, buy materials, and hire employees and subcontractors. Small business makers and creators of all kinds of locally-produced packaged products have ingredients, staffing, labeling, and distribution to cover. Across the board, advertising spending ramps up as summer approaches.
You might be able to begin each new season with a bit of a nest egg from the year before, but keeping cash in reserves just isn’t an option for a lot of small businesses. How do you fund these early season needs and grow your business early in the season?
It helps to get a handle on your cash flow situation first.
“Understanding your cash position now, and in the future, is vital to the success of your business,” said Colin Hewitt, CEO of Float. “Forecasting has been a difficult problem for so many businesses for such a long time. A big hurdle for me as a business owner is to understand what the outcome of a cost will be. If I decide to spend money on something, where will that leave me in a few months time?”
Forecasting allows us to understand the journey our cash will take, he explains.
Whether you use a cash flow forecasting app like Float or use Excel spreadsheets to do it manually, cash flow forecasting should be a weekly business activity done as rigorously as depositing cheques at the bank. When potential gaps in cash flow are identified, you can kick your management strategies into gear to prevent them.
Proactive cash flow management ensures that the heating and cooling contractor can accept that new contract and buy materials, even if the large residential build he’s just completed hasn’t yet paid its invoice. It allows the catering company that just had a large outlay of cash for a municipal government’s banquet last week to take on a new job that someone else dropped the ball on, even though the government is notoriously slow in paying its invoices.
My company, FundThrough, provides one of the tools small businesses keep in their cash flow arsenal, to both combat slow cash flow and facilitate growth. Invoice factoring puts funds you’ve already earned in your pocket right away, so you can continue to offer your clients acceptable payment terms without crippling your ability to take on new business. Credit cards, lines of credit, small business loans, and private loans are among the other financing tools you want to keep available for bridging the gap. No one solution is perfect for every cash flow shortfall, so it’s best to give yourself some diversity and choice in what is available to you.
For example, a small manufacturer who needs to buy a new piece of equipment might compare their options and decide that a short-term loan offers the ideal combination of cost of borrowing and repayment terms. Their capacity will increase with this new equipment in place, enabling them to repay the loan over a few years. As long as they are willing to jump through the bank’s credit checks and income verification hoops—and if they beat the odds and are approved—that could be the best option for them.
Now, consider this scenario. You find that this coming spring, there’s an opportunity to take on two sizeable contracts early in the season: a 60-day job in June, and a 30-day job in July. Your June client will pay a 50% deposit but will take up to 60 days to pay from job completion on July 30th to pay the balance. The second client is paying a 50% deposit as well, which will cover the materials for their job.
However, those funds you’re waiting on aren’t gravy; they’re integral to your continued operations. You will still need to pay your employees for the first job throughout the month of July, but it’s unlikely that you will collect payment on that 60-day June contract with the 60-day payment terms until the end of September or early October.
If you can make both of these contracts work, you are set up for a sizable influx of cash at the end of the summer, when both jobs that were completed on July 30th pay their invoices. But how can you grow and take on new contracts in August when you’re barely scraping by, just limping along trying to make it to payday?
This is the cycle that prevents many small businesses from growing. You can take on bigger clients, but only one or two at a time. Banks won’t even look at funding businesses that are already experiencing cash flow issues, and credit card interest rates are prohibitively expensive.
This is where a low cost, short-term financing like invoice factoring can provide the free cash flow you need, with terms you can live with. Advancing payment on that first client’s invoice means you can put those funds you’ve already earned to work for you in August when you need it most. You will repay the invoice factor in regular installments over the course of 12 weeks and have the option to reduce the invoice factoring fee with early repayment when your client pays you.
Having a plan for bridging gaps in cash flow early in the season is the key to funding the increased staff and/or subcontractors you need to maximize your season. Make that hay while you can.
Steven Uster is the Co-Founder & CEO of FundThrough, an online factoring and invoice funding platform that enables users to turn their invoices into next-day working capital.