The annual factory ‘shut down’ implemented by many manufacturing firms during the Christmas period has ramifications throughout the supply chain. John Atkinson - head of commercial business at Hitachi Capital Invoice Finance - explains.
As clients step back from the signing of contracts and order books fall, businesses must act to ride out this dip in demand, preserving cash flow to ensure costs are covered and momentum is maintained in 2016.
Overstretched working capital and the resulting problems this causes can take months to fix and has the potential to stunt company growth, therefore, forward planning is essential.
The retail and hospitality sectors excluded, a large majority of firms see a decrease in orders and activity over the Christmas season. This phenomenon is most apparent in manufacturing, where company-wide shut-downs are commonplace and can last anywhere from a few days to a few weeks.
For most companies, this move is essential – often whole assembly lines must be open for production to be maintained, and the overheads required to keep a factory running severely reduce profitability in the event of a depleted workforce.
Despite the fact that production is halted and new contracts are short in supply, businesses can act to mitigate for these circumstances through the creation of financial projections, implementation of due diligence procedures and contingency planning.
Protecting cash flow
There are a number of steps that should be taken before the shut-down period to protect cash flow.
Firstly, businesses should process and issue any invoices as soon as possible, and make efforts to follow up on any outstanding invoices; if not addressed, this income could take weeks to arrive. Late payment is still a huge issue for small businesses, and the pursuit of fair and swift payment should remain a priority.
If a firm’s working capital provision is a concern, incentives can be offered to encourage quicker payment by debtors, such as a discount on the products or services provided, or public testimonials and endorsements testifying to the ethical nature of the business.
Aside from this, financial controllers must act to delay any non-essential expenditure during the shut-down period.
For manufacturers, maintenance and the purchase of new equipment or supplies should be deferred and unusual seasonal expenses such as Christmas parties and staff gifts should be accounted for.
If necessary, traditional December bonuses can be moved to a more opportune time, such as March, to coincide with the end of the financial year.
Once fully calculated, likely business costs and cash flow should be put into the context of wider company activity, and potential risks evaluated.
For example, quarterly VAT payments to HMRC, late payment from suppliers or the investment required to fulfil large orders could put extra strain on finances and where possible, a contingency fund may be put aside to mitigate for this.
Crucially, SMEs should not rely solely on overdraft facilities to provide respite during quiet periods. Recent research reveals that banks are withdrawing small business overdrafts at a rate of £5m a day; 37% of SMEs have experienced additional restrictions during the past two years and 17% have seen their overdraft removed altogether.
As a result, alternative finance options should be explored, and the most feasible option selected in preparation for a potential cash flow shortfall.
While there are a number of options available, including short term business loans, asset-based lending and invoice finance, companies must give themselves enough time to ensure that the most appropriate option is identified and if required, funds are transferred quickly, rather than rushing into a decision.
With these plans and contingencies in place, businesses are better placed to ride out the quiet festive period while preserving the ability to protect cash-flow, pay staff and begin 2016 in a position to secure new contracts.