Managing Working capital of seasonal business - Finance Ppl

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Managing Working capital of seasonal business

Managing working capital in lean periods means keeping working capital under control and using resources carefully so the business can stay steady until demand picks up. Some methods to manage working capital in seasonal businesses are:

  1. Monthly Cash forecast

    2. A monthly cash forecast report prepared by the Receivables manager is essential for maintaining liquidity in seasonal business. It contains :

    1. Projection of the anticipated customer collections based on the company’s average DSO, ageing data.
    2. Projection of vendor payments due during the period and anticipated expenses.
    This way, the management would be able to figure out whether the company is cash deficit or cash surplus for the projected month and can make alternate short term financing arrangements to cover for exigencies
  2. Inventory Optimization:

    3. The central planning team shall plan the RM/input material procurements keeping in mind the following:

    1. The demand forecast of FG: To align RM purchase with expected sale order
    2. RM inventory turnover data (low turnover indicates excess cash tied up in stock)
    3. logistics lead time- time required to bring the material from vendor WH to factory.
    4. storage capacity at the plant’s storage facility/ entity’s WH
    5. Buffer inventory to cater to unusual demand/supply fluctuations
  3. Supplier & Receivable Management:

    4. Supplier side: Negotiate longer payment terms (eg 45–60 days) with vendors during peak demand periods. This secures additional time and allows the business to use funds more effectively instead of paying within 30 days.

    Receivables side: Improve cash inflow by offering early-payment incentives such as cash discounts to customers, rebates for future purchases etc and implement automated invoicing systems to avoid delays in issuing invoices.

  4. Short-term Financing:

    5. Using short term credit systems like invoice factoring, hundi discounting , cash credit, short term loans, to bridge cash flow gaps during the lean period.

  5. Budgetary control :

    6. Inserting budgetary control at GL expense account level is a way to keep expenses in check, especially in lean period.
    If a expense entry attempted to be passed causes the account to exceed the allocated budget for the period, system will block the said transaction and further transactions. In cases where the entry is critical and must be processed despite the overrun, explicit authorization from higher management is required before posting.