Christmas may be a festive time, but can also be a real challenge as far as managing your working capital is concerned.
Retail businesses experience a peak in sales leading up to Christmas that can often continue into the New Year. Before the sales start coming in, there are large expenses that need to be paid for and these can seriously diminish working capital. Extra stock must be purchased and money needs to be spent on promotion to attract customers to the store and online ecommerce sites to buy the merchandise.
The Independent recently estimated that the UK retail industry is spending £5.6bn on marketing for Christmas 2016. Big stores like John Lewis and Marks & Spencer spend millions of pounds on their annual Christmas marketing campaigns.
On the other hand, some business will have a dip in sales at Christmas and many businesses close for a week or two over the Christmas period. Home improvement companies, for example, may experience a Christmas lull. Not many people want disruption to their home environment during the festive season, since serving up the turkey on Christmas Day in a half-finished kitchen is few families’ idea of what the season is all about.
Any spike in expenses or dip in income means careful planning of working capital is needed. It may be necessary to take out a short-term bridging loan or ask the bank to extend the overdraft. You can also consider invoice factoring so that you can be paid for invoices earlier than normal at Christmas. As long as you can confidentially predict that the low amount of working capital is temporary, then this approach should be fine.
The key is long-term planning. You can set a budget for promotions leading up to Christmas and plan in advance how much you will need to purchase extra stock. Many businesses start their Christmas plans in the summer or earlier.
If you are a business that has a slow period at Christmas, cash reserves can be built up at more busier times.
It could be a good idea to use an outsourcing finance service that can work with your company to plan your working capital requirements for not only the Christmas season, but throughout the rest of the year.
Managing working capital can be a nightmare at this time of year, but with careful planning, it need not be, enabling you to enjoy a stress-free and very merry Christmas.