Cash flow is the lifeblood of any small and medium-sized enterprise (SME); managing cash flow properly is essential to an SME’s long-term growth. However, cash flow management remains a challenge for many SMEs in Southeast Asia for several reasons.
Firstly, it’s difficult for SMEs to get business financing from traditional institutions like banks, especially if they have no credit history. According to our SME Digital Finance and Payments Behaviours study, about 70% of SMEs across Southeast Asia sourced their seed capital from their own savings and from friends and family’s financial support. Only 23% were able to get funding from traditional banks.
Many businesses also struggle with late customer payments, needing to figure out how to pay their vendors and keep operations running while waiting for accounts receivable to come in. In addition, SMEs have to navigate a post-COVID, inflationary world with rising interest rates and cost of raw materials. According to a 2022 survey by UOB, Accenture, and Dun & Bradstreet, 58% of SMEs in Singapore have a financial runway that can sustain them for less than six months.
Cash flow management is even trickier for seasonal businesses. Those that earn the majority of their income during specific periods in the year, particularly in the retail, tourism, and agriculture industries, have to manage extreme fluctuations in the income and outflow of funds.
If you find yourself struggling with the ebbs and flows of your financing for your seasonal business, here are several options to secure the working capital you need not just to survive, but to grow your business.
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The cash flow challenge for seasonal businesses
The challenge for seasonal business owners is preparing for both the rush of seasonal highs and the slump of revenue slowdowns. During peak seasons, you need enough cash to hire temporary staff, stock up on inventory, and ramp up your marketing efforts. During low seasons, you need to have enough saved up to sustain business operations as usual amid cash flow uncertainties.
How SMEs can sustain cash flow during seasonal highs and lows
Here are a few tips that can help seasonal SMEs weather variances in cash flow:
Make holistic projections based on your finances, budget, and supply prices
Historical data helps you make cash flow projections so you can predict how much you typically earn during peak seasons, and how much you might need to sustain yourself during revenue dips.
Our customer Achmad Mustofa, owner of Toko Hidup Berkah, an Indonesian small business that sells car and motorbike covers and blankets, prepares for low seasons by saving 10% of global net revenue when the business exceeds sales targets. With this buffer, he doesn’t always have to cut costs during low seasons.
To keep on top of his cash flow, he regularly conducts forecasts on product raw material prices, operational costs, product selling prices, and product targets. Having a bird’s eye view of various financial data helps him control operational costs and adapt quickly in case the business does not perform as well as usual and stocks pile up.
An average of 61% of business owners across the region who contributed to our SME Digital Finance and Payments Behaviours study said they use accounting software to automate payments and record all transactions, including payables and receivables. This helped them to monitor their finances more efficiently and make better cash flow judgement calls and forecasts based on data.
There are also cash flow management platforms that can automatically pull data from all categories of a business’ finances — including payables, receivables, and loans — onto a single dashboard, which gives you a holistic view of your business’s overall financial health.
Accounting software like Quickbooks and Xero can also be integrated with business forecasting tools, such as Fathom or Float. They use historical data to identify trends in your cash flow, allowing you to see which months rake in the most revenue, how well you manage your budgets, and how your business might fare in different scenarios — for example, if you were to increase budgets for staff, or what the odds are of your business growing by a certain percentage point over a period of time.
Use a variety of sales strategies during low seasons, such as pre-selling
Even though seasonal businesses make the majority of their revenue during short spurts throughout the year, there are plenty of opportunities to land sales during off seasons by offering seasonal promotions and incentives.
You can offer to cover shipping costs, early-bird discounts, or even host raffles or giveaways to spur consumer interest before peak season hits. These promotions may entice customers to buy before seasonal demand skyrockets pricing for certain items.
Mustofa also revealed that he sells using a pre-order system during off-seasons. Not only does this allow him to rake in sales, but it also helps him to gauge consumer interest during this time and better plan inventory when peak season arrives.
“Seasonal products must be managed and prepared before the season arrives by considering various aspects including product aspects, product peak times, product targets, and product operational costs,” he said.
Negotiate flexible payment terms with your supplier
According to our study, inventory and supplies are among SMEs’ most significant expenses. We also found that most SMEs were more concerned about payables than receivables, particularly with regard to their capacity to pay suppliers.
If this is also a concern for you, try negotiating with your suppliers for flexible payment terms. For instance, you can request to purchase goods on trade credit, wherein you agree to settle the payment at a later date—usually within 30, 60, or 90 days. The specific terms and conditions can include payment only after receiving goods after a certain number of days, or a percentage of the payment upfront and then the balance at a later date. You could even request for discounts on the basis that you pay in advance.
These types of setups can help you to stay flexible with your finances and strengthen relationships with your vendors. As long as you understand your suppliers’ needs, communicate your terms clearly and respectfully, and consistently fulfil your side of the bargain, you can build trust and rapport.
Otherwise, you can opt to tap on supply chain financing, which allows you to receive financing for what you owe suppliers while giving you more time to settle your balances. This type of financing is offered by third party financiers and can give you more control over your cash flow without burdening your suppliers.
Seek alternative seasonal business financing
Our SME Digital Finance and Payments Behaviours study found that the most significant holidays were Christmas and Chinese New Year in Malaysia and Singapore, and Tết Nguyên Đán in Vietnam. These holidays see a rise in consumer demand and raw material prices, putting a strain on SME budgets. Many businesses seek investment during these periods to ramp up their marketing and maximise sales.
“With the immense opportunity presented by Black Friday and Cyber Monday sales, we seize the chance to stock up on inventory and ramp up marketing efforts,” explains Larry Tan, technology leader of Singaporean business Respire Pte Ltd. “Financing plays a significant role in helping us meet the increased demands and take full advantage of these major shopping events.”
But short-term funding isn’t exclusive to peak seasons. You can consider seeking funding to make the most of off-seasons or to tide you through an emergency, supplier shortfall, or any other unforeseen incident.
Yadi Karyadi, owner of Dapoer Dini, an Indonesian small business that sells Muslim fashion products and various Eid cakes, said that high peak periods for his business are usually before Eid al-Fitr or long holidays. Meanwhile, low peak seasons usually fall in the months after Eid al-Fitr approaching the month of Eid al-Adha. “The difference in turnover between these months is around 30%,” Karyadi said.
Before a low season, Karyadi cushions his cash flow through taking on loans. There are many types of short-term loans and financing solutions in the market, so consider carefully before picking the one that best suits your needs. Karyadi shared that he typically looks for financing options with low interest rates that are “easy to disburse” and “conditions that are not complicated”.
Another tip would be to reduce the risks of being over-reliant on a single source of funding by diversifying financing resources. Grants, peer-to-peer or peer-to-business lending, accounts receivable financing, or accounts payable financing are some of the options at your fingertips.
Managing cash flow together
Though cash flow continues to be a key challenge for seasonal businesses in Southeast Asia, there are now more opportunities for SMEs to take advantage of both the highs and the lows of the year. If you need funding to prepare for this year’s upcoming peak season, take this quiz to figure out which financing option best suits your needs.
Disclaimer: The information provided to you in this blog post is intended only for general information purposes only and does not constitute legal or other professional advice on any subject matter. The materials and the information provided are not intended to be and do not constitute an advertisement or solicitation. In no event will Funding Societies be liable to any party for any direct, indirect, incidental, special, consequential or punitive damages for use of such information by you or any unauthorised third party.
Funding Societies’ Supply Chain Financing is fulfilled by FS Capital Pte Ltd.
- Forecasting and Financial risks: A Guide for Businesses Experiencing Seasonal Demand - November 9, 2023
- Managing Receivables an Asia-Wide Problem: SMEs Turn to New Solutions - November 7, 2023
- Cash Flow Management Strategies for Seasonal Businesses - November 6, 2023