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Simon Quin, North East and Scotland area director for Global Transaction Banking, SME at Lloyds Bank Commercial Banking

August is upon us, and while the higher temperatures might lift the mood, the peak of the holiday season this month also brings new challenges and opportunities for a broad range of businesses.

Staff going on their summer holidays can cause back office processes to slow down, potentially affecting the time it takes for their suppliers to get paid.

For small to medium sized enterprises (SMEs), any rise in demand or lengthening of payment times can impact cash flow and increase a business’ working capital requirements – the amount of cash needed to cover day-to-day costs.

For SMEs in particular, changes in cash flow can be particularly damaging. Our recent Working Capital Index report found that businesses in the North East have £166.4bn tied up in excess working capital. This is money that, if managed more effectively, could be released into cash and used to invest in growth or pay down debts.

To alleviate some of the financial strains that can come with the summer demand, there are simple steps a business can take to prepare.

Preparing for payment delays

Staffing shortages caused by colleagues taking annual leave can mean firms take longer to invoice their customers or pay their suppliers.

While sometimes unavoidable, these delays can put added pressures on cash flow. The best way to combat this is to keep up regular contact with your client or customer. Open lines of communication over summer can help firms identify when payments are going to be delayed, and prepare their finances accordingly.

Agreeing new payment terms with customers can be daunting, especially if the relationship is new, but doing this can iron out any additional details that the customer needs to process the invoice – ensuring no delays are caused by misinformation.

Secondly – and while this may be an obvious step – SMEs should make sure they are aware of all their firm’s income and expenditure. Doing so makes it much easier for businesses to forecast their cash flow accurately, while also making it easier for businesses to cope when payments may be delayed, as they know how much money will be coming in, and when.

Focusing on working capital

Having complete oversight of a business’s working capital makes it much easier to manage.

Also, it’s important to ensure that any changes made in a business to combat working capital inefficiencies are fully understood and carried out by all across the business. Even seemingly minor improvements in the cash conversion cycle can free up working capital and yield dramatic results for a business.

To support businesses in this area, Lloyds Bank has a working capital management tool that allows our relationship managers to analyse a business’s cash cycles and suggest adjustments to debtors, creditors and stock to unlock trapped cash.

There’s help available

Sometimes, however, a slowdown is inevitable. And to make sure businesses can deal with the financial strain that comes with delayed payments, there are financing options available to help firms manage seasonal peaks or troughs.

Invoice finance, for example, allows businesses to access up to 90 per cent of the value of an invoice within 24 hours of it being issued, giving them access to cash and certainty of payment. 

While optimising working capital can be hard, it can prove most worthwhile during a seasonal spike, or when payments slow for a period.

Making these changes now can help firms prosper throughout the summer months, and leave them better equipped to deal with any future changes once the nights being to draw in again in autumn.

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