8 min read
17 Jan 2024
8 min read
17 Jan 2024
As we enter the new year, the busiest — read craziest — time of the retail season has ebbed away, ushering in the next phase of the retail year — the eventual post-holiday slowdown. Seasonality and financial stability are top of mind for many CFOs.
Now is a perfect time to reflect on the cyclical nature of consumer demand throughout the year, which can pose significant challenges, leaving many businesses grappling with cash flow issues and funding gaps.
In this blog, we’ll discuss the intricacies of seasonality and explore the role that Flexible Funding 2.0 could have in helping businesses weather seasonal cash flows, ensuring they maintain and optimize liquidity while also being able to support their suppliers and strengthen supply chains.
The first crucial step in effectively managing seasonality is ensuring a deep understanding of how and when it will impact your business. Identifying peak and off-peak periods enables firms to strategize and plan for the inevitable highs and lows, whether adjusting inventory levels or managing receivables and payables. Staffing and marketing efforts can also be heavily impacted.
A clear grasp of seasonality empowers businesses to make informed decisions to manage and mitigate its effects actively. In particular, the retail (food, clothing, and household appliances), hospitality, and travel/airline sectors will often see massive swings in working capital and related cash flows.
Navigating the ups and downs of seasonal changes is essential for the function of every treasury department. Treasurers often have the difficult task of shaping a company’s strategies to embrace the highs and navigate the lows — a frequently thankless task, ignored when everything is running smoothly, and intensely interrogated when difficulties occur.
Whether tweaking the components of working capital, optimizing staffing levels, or refining marketing spend, a genuine understanding of seasonality empowers businesses to make well-informed and value-adding decisions. Significant shifts in working capital occur throughout the year for sectors like retail, hospitality, and travel, underscoring the importance of approaching these challenges with data to help develop and build on historical insights and trading patterns.
Due to the inherent revenue and cash flow fluctuations, highly seasonal businesses can be particularly exposed to a short-term and relatively sudden liquidity squeeze that often requires careful planning and proactive management.
However, while reliable in stable conditions, traditional funding sources may prove inadequate or inflexible when faced with the erratic nature of seasonal demand patterns. These challenges can hinder growth opportunities, leaving businesses unable to capitalize on the peak seasons or struggling with liquidity following high-transaction periods.
Short-term funding solutions help bridge funding gaps or better utilize cash surpluses that can often emerge during periods of seasonality or volatile cash flow periods. Whether it’s investing in additional inventory to meet peak demand, launching targeted marketing, supplier support campaigns, or covering operational expenses during a slow season, financial tools such as inventory and invoice financing or supply chain finance (SCF) can help businesses manage and optimize during short-term periods of cash volatility.
Traditional forms of short-term funding, such as receivables financing, cash advance payments, and SCF, have provided businesses with much-needed liquidity in times of need, but they are not without drawbacks. For instance, while receivables financing or cash advances may allow companies a quick way to access funds, they can also come with high costs and fees. They might also cause longer-term damage to your trading relationships, whether with your bank or your suppliers.
There are also scale issues when it comes to traditional SCF programs, which are limited by low uptake across the supplier base, making the benefits much harder to realize — especially at a moment’s notice.
This is where Taulia’s Flexible Funding 2.0 solution can be utilized.
Flexible Funding 2.0 allows companies to seamlessly shift between utilizing their own excess funds for early payments in Dynamic Discounting or accessing third-party funding through Supply Chain Finance. In Flexible Funding 2.0, the system automatically draws from the appropriate funding source for each invoice based on the customer’s predefined liquidity limits. An added advantage is the ability for a company to share its so-called “wallet” across a wider and more diverse group of funders.
Flexible Funding 2.0 helps optimize cash management by aligning with organizations’ cyclical or seasonal demand for early payments. Taulia’s team collaborates with buyers to understand the trends in cash flow and build a tailored, Flexible Funding model that works to maximize returns while ensuring suppliers have their demand for cash flow met.
Recognizing both suppliers’ and buyers’ needs, it ensures efficient use of excess cash, preventing potential constraints on funding and safeguarding the organization’s liquidity by seamlessly transitioning to third-party funds when liquidity limits are reached.
Unlike many traditional short-term funding options, Flexible Funding 2.0 benefits both buyer and supplier. Flexible Funding 2.0 serves as a cash conservation tool for buyers, allowing corporate treasuries to adjust cash levels strategically or to optimize key financial metrics such as DPO.
Buyers deploy excess cash for self-funded early payments, a risk-free and win-win way to capitalize. The system ensures reliable liquidity, optimizing returns by maintaining supplier trust and offering financial optionality through configurable Liquidity Limits.
For suppliers, Flexible Funding 2.0 ensures reliable cash flow, eliminating concerns about interruptions in liquidity that might affect their ability to meet customer demand. Funding remains constant whether the buyer opts for self or third-party financing.
This consistent support fosters stronger buyer-supplier relationships, promoting collaboration and trust. Moreover, it enables growth by providing suppliers with a predictable stream of cash, allowing for confident planning and strategy implementation in uncertain business environments.
In creating this harmonious payment ecosystem, treasury can play a vital role in accomplishing broader business objectives across the organization. By providing stable cash flow into and out of the business, treasury builds a stable base for other functions within the company. For counterparts in Procurement, for instance, where supplier relationship management is essential to operations, smoothing transactional flows can increase productivity and contribute to making the business more competitive in its market.
In essence, with Flexible Funding 2.0, Treasury becomes a solution driver and business partner.
In the ever-changing landscape of business, seasonality will remain a challenge. Armed with accurate seasonality data and the strategic use of Flexible Funding, businesses can transform the challenges into opportunities for growth and greater success.
By understanding the nuances of seasonality and embracing solutions like Taulia’s Flexible Funding 2.0, businesses can ensure they are well-equipped to handle the inevitable peaks and troughs and support their supply chain. The benefits extend beyond financial support, offering improved cash flow management, reduced risk, and increased overall stability. In the end, businesses that leverage a Flexible Funding model can build more resilient and competitive supply chains.
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