Like most small business owners, you probably don’t want to think about slow periods. You’re heavily invested in building your brand, ensuring that value is packed into every transaction and that you stand head and shoulders above your competitors. Maybe you’ve devised a loyalty program to keep customers coming back, or referral schemes to encourage them to bring a friend with them next time. You’ve done all that you can to ensure that business is good all year round.
Nonetheless, despite your best efforts, slow periods are a natural (perhaps even inevitable) part of doing business. And unless they’re properly prepared for, these periods can stymie cash flow and curtail investment opportunities. Even if your business is agile with low overheads and no physical space, you may still feel the pinch when a seasonal lull or unexpected recession slows your revenue streams.
The thought of encountering slow periods may be unpalatable, but remember the 5 Ps – prior preparation prevents poor performance. Knowing how to prepare for slow periods can prevent cash flow gaps from grinding your operations to a halt. Join us as we look at how to spot, plan for and mitigate these cash flow gaps during slow periods.
How to identify upcoming cash flow gaps
Many small businesses like yours have an upcoming cash flow gap that they’re completely unprepared for. The more proactive you are about spotting these cash flow gaps in advance, the better able you’ll be to prepare for them with the right business loans or preventative spending measures. Before we get into those, let’s take a look at how you can identify upcoming slow periods that could lead to cash flow gaps.
The next move is yours with a small business loan
Carry out regular cash flow statements
It doesn’t matter if business is booming or struggling, no business can afford to take its eyes off its cash flow. Which is why regular cash flow statements and analysis are such an important part of doing business. They can help you to identify trends and spot areas of excessive or wasteful spending, and generally give you a better sense of your company’s financial health. The more liquidity you have, the better you can ride out slow periods. Most accounting software platforms have easy tools to help you do this, and the Australian Business Government website has a useful template to set up a cash flow statement manually.
Learn the cash gap formula
There is a formula to be used to measure cash gaps. This is the time between when funds are dedicated to payables or payroll and when you receive payment for goods or services you have sold. It’s a useful way to determine how well your company is using its working capital and to identify inefficiencies that could exacerbate cash flow gaps from slow periods.
The formula is as follows:
Days’ Inventory + Days’ Receivables – Days’ Payables = Cash Gap
Day’s Inventory- The number of days’ worth of inventory you have available for sale
Days’ Receivables- The number of days it takes to collect the cash from the invoices that you’ve sent to customers
Days’ Payables- The average number of days you take to pay your suppliers
Invest in forecasting software
Some accounting platforms have advanced forecasting features that include scenario planning. These enable you to see the impact of ‘what if’ scenarios on your cash flow in seconds, empowering you to plan and allocate resources accordingly.
Because Square offers a robust suite of integrations, you can ensure seamless connectivity with all kinds of accounting software to ensure accurate projections based on your POS data.
How to prepare for upcoming cash flow gaps
Being able to spot future cash flow gaps is one thing. Knowing how to prepare for them is another, which requires a different set of strategies. If you believe that a slow period may be on the horizon, here are some ways to mitigate its effects on your business.
Identify excessive spending
Regular cash flow analysis might help you to identify areas where you’re spending more than you need to. Preparing for your next slow period might mean holding off on capital expenditures for a little while, carefully monitoring spending on inventory and thinking carefully about larger purchases.
Get paid on time
Now’s the time to build your liquidity, so take a close look at your accounts receivable to see if you can get the funds faster that are coming to you. Offering customers a modest discount for faster payment, for instance, can ease liquidity at a fairly negligible cost to your margin.
Provide flexible ways to pay
Offering your customers more ways to pay can help ensure that your cash flow is as accurate as possible. If you offer bank transfers, you could think about introducing Invoices as a quicker and easier payment method. With Square Invoices you can also setup automatic payment reminders so that you can save time on the admin.
Be realistic about staffing
If you have a team, take a look at shift patterns for the upcoming weeks to determine whether you may be overstaffed. Square’s team management software can help you to set schedules easily and get a clear idea of how much you spend on staffing, so you can find the sweet spot between providing excellent service to your customers and keeping personnel costs manageable.
Know your business financing options
Saving and cost-cutting can help to mitigate the effects of slow periods. Realistically, your business may need to rely on small business loans to help you to maintain cash flow and keep operations running smoothly while upholding the standards that your customers expect.
Business borrowing isn’t necessarily a bad thing. But it’s crucial to be discerning when choosing a commercial loan for their needs. You need to choose business financing that is available quickly with costs that won’t put a huge squeeze on future margins or prolong the debt unnecessarily.
Choosing the right loan for your needs and circumstances may prove tricky. Fortunately, we’re here to make it easier for you.
How Square can help
Square Loans are designed to provide quick and easy access to funding while simplifying repayments and making them more manageable for users. Square Loans are available to current and eligible Square customers. We determine your business’s eligibility for a small business loan and, if eligible, provide you with a customised offer based on the card sales you process with Square. Simply choose your loan size and apply in minutes. If approved, funding is made available as soon as the next business day and repayments are made automatically as a percentage of your daily card sales through Square.
Combined with improved financial transparency and a proactive approach to your business finances, the right funding can make a world of difference during a slow period.
This article is only for educational purposes and does not constitute legal, financial or tax advice. Make sure you consult a professional regarding your unique business needs.
All loans are issued by Square AU Pty Ltd. (ABN 38 167 106 176). Valid Australian bank account is required. Actual fee depends upon payment card processing history, loan amount and other eligibility factors. A minimum payment of 1/18th of the initial loan balance is required every 60 days and full loan repayment is required within 18 months. Loan eligibility is not guaranteed. Eligibility criteria include consistent and continuous payment card processing through Square. All loans are subject to credit approval. Terms and conditions apply.