Overcoming seasonality

Most businesses are affected by fluctuations in trade at different times of the year, so is it better to fight that tide or go with the flow? GrowthBusiness investigates the age-old problem of seasonality.

Whether you sell strawberries at Wimbledon, make Christmas crackers or even shift software, chances are that your business’ fortunes will rise and fall with the seasons. But while trading may be perky in the peaks and tough in the troughs, is being a lumpy business, in itself, a bad thing?

Opinion is largely divided. After all, as James Lambert, chief executive of ice cream manufacturer Richmond Foods muses, ‘there are both advantages and disadvantages to being seasonal.’ The disadvantages are well publicised, not least the fact that most seasonal firms find themselves facing their greatest costs during their quietest revenue generation periods. But, says the level-headed Lambert, ‘we always know that summer is going to come and that during those months supermarket sales of ice cream will increase threefold and impulse sales, at the beach for example, will rise around fifty times.’

Think strategically

In many respects, Richmond has developed into the archetypal seasonal success story. Founded in 1985, the company has rapidly grown into the UK’s largest ice cream manufacturer, generating an £11 million profit last year on sales of £144 million. Perhaps even more significantly, the company has managed to turn the rather nifty trick of piling up the profits – to the tune of £1.4 million most recently – during the winter months too.

The secret, Lambert confides, is to plan carefully and innovatively. ‘Seasonality isn’t necessarily a bad thing, you just have to manage it in line with your own strengths,’ he suggests. ‘What we’ve tried to do is reduce the effect of seasonality and optimise our sales. We do this by trying to pre-empt what our retailers and customers want. Our recently developed Skinny Cow range is a good example of this, as low-fat ice cream sells particularly well in January. While you can sell anything when it’s 85 degrees outside, in winter you have to be clever.’

Toby Stephenson, a partner at accountancy and advisory group PKF, is another champion of offsetting seasonality by being as innovative as possible.

‘I know of one retailer that started out as a skiwear business but which has moved into selling extreme sports clothing and equipment in the summer,’ he explains. ‘The key is to diversify until you iron out the lumpiness. Ideally, you don’t want to be loss-making for six months of the year and profitable for the rest.’

Cash flow is key

For seasonal businesses careful planning is important for the long term, yet it doesn’t help overcome the immediate problems many experience.

Maintaining adequate cash flow will be a particular concern for many growing firms. ‘Businesses die because of a lack of cash, not a lack of profits,’ ventures Paul Chadney, a seasonal business expert from Barclays’ business banking team. The reasoning is simple: without cash, workers can’t be paid, raw materials can’t be purchased and a business ultimately can’t function. ‘You must ensure you have sufficient money passing through your business to meet regular bills,’ Pete Ferns, NatWest’s director of business banking advises.

There are, of course, several tricks to keeping the cash flowing. The simplest step is to be crafty with your invoices. ‘You’ve got to try and get some sort of upfront contract payments through from your customers,’ PKF’s Stephenson argues, and at the same time, ‘you want to try to pay your suppliers over the longest period possible.’

Moonpig, which operates an online portal allowing consumers to design and send greetings cards, meanwhile, benefits from a different approach. As you’d expect from a business of this type, Moonpig trades particularly strongly at certain times of year: around Christmas and Valentine’s Day. Yet cash is less of a concern because, as chief executive Nick Jenkins states, ‘our cash cycle is slightly different as we take card payments upfront. That’s the beauty of the online model.’

Overdrafts and loans

Bank overdrafts afford businesses an added degree of flexibility during quiet trading periods – providing additional access to cash as and when it is needed and enabling unforeseen costs to be dealt with rapidly. The drawback with overdrafts is that they can prove both expensive and largely unstructured.

Business bank loans offer a cheaper alternative, in particular, the flexible loans offered by many banks. Through these schemes, lenders will loan their business customers an amount of cash – say £10,000 – and will then tailor repayments to match the individual needs and seasonal peaks and troughs of that client.

‘Our view is that if there is no income during a period then there is no point making repayments,’ Barclays’ Chadney elaborates. ‘So [using the example of a holiday park business] we may lend the money in October and receive no repayments at all until March when they begin to take bookings.’

Needless to say, this model will be attractive to firms affected by severe seasonality because, as Chadney explains, ‘overdraft financing is more expensive than loan finance and loan finance is also more structured. You know from day one that, providing you keep up repayments, you have a 20-year agreement on which the terms are secured.’

The major drawback with loans is precisely that, however. Take on a 20-year business loan and you are tied to that loan for 20 years. This may be a touch extreme but for rapidly-growing businesses, long-term loan commitments will be a burden they would happily avoid. Therefore, increasing numbers of growing businesses are turning to asset-based finance.

Leverage your assets

Asset-based finance packages have one significant advantage over loans and overdrafts, namely that they grow with a business. Through these packages a bank or other lender will advance cash against the assets already held by a business. Finance can therefore be provided against property, land or – more significantly for seasonal businesses – unpaid invoices and reserves of stock.

Invoice discounting is particularly popular as it enables businesses to leverage their unpaid invoices. Typically, an invoice-discounting firm will advance around 85 per cent of an invoice’s value to within 24 hours of it being raised. The onus then remains with the business to collect the money back from its own customers.

The downside of invoice discounting is that, as Jon Adams, a regional director of Lloyds TSB Commercial Finance acknowledges, ‘with seasonal businesses orders will decrease at various times of the year so borrowing against your debtors will not always be ideal.’

This is where stock finance comes in. Most seasonal firms use quieter periods to build stock levels ready for the impending sales spikes. Stock finance schemes enable these businesses to borrow against their reserves – say 50 per cent of the stock’s ‘anticipated for-sale’ value.

The more security you can offer the better the terms you will receive. ‘You’ll get a better advance rate if you have a signed contract to leverage against,’ Adams states. ‘If you’re a wrapping paper company and you have a confirmed order from someone like Tesco we may advance up to 85 per cent.’

‘You want to trade with people who pay on time,’ says Richmond Foods’ Lambert. ‘The big supermarkets are very good payers and the banks will give you better finance terms if they are your customers.’

The danger with borrowing against stock, however, is that there is no guarantee you will eventually be able to offload those goods at a decent price, which is why more tends to be advanced against invoices.

‘It’s really a case of balancing your production cycle,’ PKF’s Stephenson notes. ‘It works best if your margins are high. So with ice cream, if the manufacturing cost is 25p a tub and the retail price is £1, the stock finance firm will see you can still offload your stock pretty quickly and at a reduced price and yet still turn a decent profit.

‘Typically, it’s an integrated package with stock finance and invoice discounting involved. So you’ll receive some cash on the stock and then some on your invoices once you’ve raised them, minus the commission they charge.’

Planning for the peaks

The final significant issue many seasonal businesses will face the labour market.

‘In truth, our biggest problems are with capacity,’ Moonpig’s chief executive Neil Jenkins admits. ‘Over Christmas we can produce 15,000 cards a day. At other times of year we will only send out between 1,500 and 2,000.

‘Casual staff are a big issue. It’s very easy to arrange temporary staff over Christmas – a period in which Moonpig’s post room team rises from two to 17 – but you have to have somewhere to put them. As I see it you have two options. You can either fill the space you have for 11 months of the year but have too little come your busy weeks and have to work out where to put people, or you can have ample space for your peak periods and mothball it during quieter times.

‘We’ve got a lot of space in our offices upstairs, so, if needs be, we’ll work from home for a few days while our desks become a base for envelope stuffing. The other thing you can do is hire serviced office space. At the end of the day it all comes down to being flexible, thinking creatively and planning ahead.’

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.