A Quiet Summer. What Happens to Cashflow When It Picks Up?

The out-of-office replies have stopped. Emails sent in the middle of August are finally being answered, the diary is filling up, and quotes that went quiet in July are suddenly live again.

For any business that invoices other businesses on credit terms, this is the point at which the year starts moving again. It is also, in our experience, the point at which cashflow can become uncomfortable, not because trade is weak, but because the work comes back before the money does.

The summer was slow. Not for everyone, obviously; if you sell ice cream you have had an excellent three months! But for many of the businesses we deal with, and many of the people we have spoken to, it has been quieter than it ought to have been for the time of year. That is anecdotal rather than statistical, and we would not pretend otherwise, but it has been consistent enough across different trades to be worth saying out loud.

The heat probably accounts for a good deal of it. In the week of 22 June alone, around 1.25 million people in this country did not work at all because of it, according to the Grantham Research Institute at the LSE, and that was before the worst of July. Then came the school holidays, when the person who has to approve an order is likely away with their family. Work does not get refused in August so much as deferred, and a deferred decision is simply one that will be taken later.

None of which is unusual in itself. Some version of this happens most years. The summer goes slowly, the work banks up behind it, and September and October turn out busier than either. This year the heat has made it more pronounced than usual, but the shape of it is familiar enough.

What is worth thinking about, before the work arrives, is what all that does to your cash. If your order book fills up again this autumn, the first pressure is not whether the work exists; it is how you pay for the labour, materials, fuel and subcontractors needed to deliver it before your customers pay you. A busy quarter costs money long before it produces cash, and that squeeze lands at precisely the moment a quiet summer has left you with less behind you than usual.

Most of that work has not gone anywhere

This is the part we keep returning to. A decision postponed in June is still a decision. An order held over in July is still an order. A project that could not be started in the heat still needs starting.

Not all of it, and we should be straight about that. Some of what did not happen this summer is gone rather than delayed. Construction is the clearest example, where the difficulty has been demand rather than a queue, and has been for the better part of two years. But a good deal of it is sitting there waiting, and it has been accumulating for three months.

The timing matters because delayed work does not usually arrive neatly spaced out. Orders that paused through July and August can reappear close together, while the costs attached to them are immediate. That is where a sensible order book can start to feel like a cashflow problem.

It is also why the restart tends to come later than people expect. The catching up does not usually begin in the first week of September, while everyone is still finding their desk and decisions are being picked back up, but towards the end of the month. The pressure it creates is therefore more likely to arrive in October than September, just as suppliers, staff and subcontractors need paying again.

The quiet spell is not the risky part

A quiet quarter does not feel dangerous. It feels like a lull. You trim where you can, you keep everyone occupied, you get through it and you wait for the telephone to start ringing properly again.

The part worth considering now is what happens when it does.

A quiet summer does not empty your order book. It uses up the reserve you would ordinarily rely on to fund a busy autumn.

Work costs money before it earns any. Wages, materials, subcontractors and fuel are all paid weeks before the invoice goes out, and a month or two more before anybody settles it. In an ordinary year that gap is uncomfortable but manageable, because you have been trading steadily and there is something behind you.

After a quiet summer there is rather less behind you: the same gap, on the same payment terms, against a larger order book, landing on a thinner balance sheet.

That is the difficulty which catches people out, and it is a perverse one. The better the recovery, the harder the squeeze. Winning the work is the good news. Funding it is the part that seldom finds its way into anybody’s plan.

Three questions worth putting to yourself this month

These are the ones we would ask a client sitting across the desk from us.

• If your order book doubled in October, how much would you have to pay out before the first of those invoices was settled? Not turnover, but cash actually leaving the account.
• Which of your customers are slowest to pay, and what happens if they are the ones who come back first?
• What would you have to turn down?

The last of those is the least comfortable. Turning down good work for want of the cash to fund it is among the most expensive things a healthy business can do, and it appears nowhere in the accounts.

Our view on covering it

You would expect us to say this, so take it for what it is worth. We do not think the answer is generally to borrow against the future. Money borrowed to fund a busy autumn has to be repaid out of the same autumn, so the good quarter arrives already carrying a deduction.

Selective invoice finance works the other way about. It releases the value of invoices you have already issued, typically up to 80% of approved invoice, immediately, so that completed work starts funding the next job instead of waiting on your customer’s payment run. It is not a loan and it puts no debt on the balance sheet. Approval rests principally on your customer’s creditworthiness rather than on your own credit history, and it clears itself when they pay. Because the amount available grows as your invoicing grows, it matches the shape of the problem: more work creates more invoices, and those invoices can release more working capital.

Where it is the wrong answer

• If you invoice consumers rather than businesses, there is nothing here to work with.
• If your customer book consists largely of slow payers with weak credit, the amount available will be limited.
• If your invoices are small and numerous, the administration can outweigh the benefit.
• And if trade does not pick up after all, you will not need it.

That last point is the only reason we would suggest looking at it now rather than in November. Not because we are certain you will need it, but because arranging anything takes a conversation and a certain amount of paperwork, and doing that while the telephone is quiet is a great deal easier than doing it in the middle of your busiest month of the year. A facility that costs nothing while it sits unused is an inexpensive thing to have been wrong about.

We may well be wrong

A good many people expected last autumn to be busier than it turned out to be, and there is no guarantee this one is any different. We are going on what people are telling us and on having watched a good many quiet spells end, rather than on anything that deserves to be called a forecast.

But quiet spells do end, and in our experience they end rather more quickly than they began. If you are seeing early signs of it picking up in your line of work, we should be glad to hear it. Leave a comment below.