Understanding seasonal cashflow

Published on March 10, 2016

There is a saying “look at your turnover for vanity but look at your profit for sanity”. Finance Directors prefer to say “look at your cashflow for peace of mind”. As soon as a business gives or receives credit and/or invests in stock or equipment there is a significant difference between profit and cashflow. For businesses with a peak season for delivery of their goods and services, the impact on their monthly cash balances is even more significant. One of our clients wholesaled fireworks. Whilst there was an underlying level of business throughout the year (for weddings and birthday parties) the two key dates were Bonfire Night and New Year’s Eve. If they did not get the goods into stock six weeks before each of these two dates, they would miss the sales opportunity for another year. So it was essential to manage profits and cashflow so as to finance the purchase of goods at the right time. Presenting information to the board and lenders that had realistic timescales and met all the lending criteria was essential to their success.

An even more time critical example is those companies who offer annual subscriptions. Normally the cash comes in once a year, and the revenue is recognised in twelve monthly instalments. Frequently such organisations have a seasonal peak in subscription dates, and sometimes they have one fixed renewal date for all customers. In the latter case, payment 12 months in advance boosts the cash balance but care needs to be taken to ensure that the advance portion (often described as revenue in advance) is reported every month. Even though this is less than the actual cash, knowing it will give you peace of mind.