How to Avoid Cash Flow Gaps During Seasonal Spikes in Demand

The fall season, holiday sales, the start of the construction season, the summer tourism peak, or harvest time all share one common pattern: a business needs more money even before it starts earning more. That is precisely why cash flow gaps most often arise not during a downturn, but during periods of active growth in demand. The faster a company scales up its purchases, production, or inventory, the more funds it withdraws from circulation.

For small and medium-sized businesses, this is one of the most common financial problems. According to international studies, more than 80% of cases of corporate insolvency are linked specifically to cash flow problems, rather than to unprofitable operations. A business may show stable profits in its financial statements and have a portfolio of orders spanning several months, yet still lack sufficient funds to pay its bills.

The most dangerous thing is that seasonal demand often creates the illusion of financial well-being. Sales are rising, managers are signing new contracts, and the warehouse is actively shipping out products. However, payments from customers are delayed, while purchases, salaries, logistics, and taxes need to be paid today. This is how cash flow gaps arise in a business, even if the company is operating at a profit.

Why would a profitable company suddenly run out of money?

One of the most common mistakes entrepreneurs make is viewing profit as an indicator of cash availability. In reality, these are two different financial metrics. Profit shows how much a company has earned from its operations. Cash flow, on the other hand, indicates how much cash is actually in the company’s accounts at a given moment. It is precisely because of this difference that a company can be profitable yet still lose its solvency.

Let’s look at a simplified example.

At first glance, the situation looks great. However, it’s worth taking a closer look at the flow of funds.

As a result, the company shows a profit on paper, but is already experiencing a liquidity shortage this month.

CFOs pay much closer attention to cash flow than to net income. For operations, it’s important not only to make money but also to receive it at the right time. This problem is particularly acute during periods of seasonal demand growth. To fulfill a larger number of orders, a company is forced to increase its purchases long before customers begin paying their bills.

For example, an electronics distributor is preparing for the November sales. As early as August, it builds up additional inventory worth 8 million UAH. Suppliers expect payment within 14 days. Major corporate clients operate on a 45- to 60-day payment deferral. For nearly two months, the company finances future sales with its own funds. Rapid sales growth sometimes puts more pressure on liquidity than a temporary decline in demand.

Here’s another example typical of manufacturing companies. If a company receives a large order, it must immediately purchase materials, ramp up production, and pay for additional staff shifts, logistics, and energy costs. All of these expenses are incurred several weeks or even months before final settlement with the customer.

Experienced business owners analyze not only the profitability of a deal but also how much working capital it will require. Sometimes a large contract can temporarily undermine a company’s financial stability more than several small orders with short payment cycles.

The easiest way to assess risk is to ask yourself: How long does the company finance its customers using its own funds? If this period is constantly increasing, the risk of cash flow gaps also increases, even if profits remain stable.

The Main Causes of Cash Register Discrepancies During Peak Season

During the peak season, the financial burden on a business increases in several areas at once. This is precisely what makes seasonal cash flow gaps particularly dangerous. The problem rarely stems from a single factor. Most often, a company simultaneously faces increased purchasing, slower cash inflows, rising operating expenses, and the need to maintain larger inventories. As a result, a company may see its revenue increase by 30–40%, but its working capital requirements rise by as much as 60–80%.

Delays in payment from customers

Accounts receivable create the greatest burden. In the B2B sector, payment deferrals of 30–90 days have long been standard practice. Large retail chains, construction companies, healthcare facilities, manufacturing enterprises, and the public sector rarely pay their invoices immediately upon delivery. For businesses, this means that the products have already been manufactured, shipped, and are even being used by the customer, but the money has not yet been received.

Example. The company increased its pre-season sales from 6 to 9 million UAH per month. The average payment term is 45 days. In effect, the additional 3 million UAH in sales is financed by the company’s own funds for nearly a month and a half. The faster the business grows, the faster accounts receivable increase.

That is precisely why many rapidly growing companies need additional working capital financing, even though they are formally showing strong results.

Purchases of inventory occur before sales

Another characteristic feature of a seasonal business is that goods or raw materials must be purchased in advance. For example, a company expects demand to increase in October.

To fulfill all orders, the following must be done as early as August:

• purchase additional raw materials;
• increase inventory levels;
• pay for shipping;
• prepare production facilities.

In fact, the money leaves the company’s account 30–60 days before the first revenue from these goods is generated. In many industries, inventory is the biggest “consumer” of liquidity.

For example, if the average inventory balance increases from 5 to 9 million UAH, the company must find an additional 4 million UAH just to stock the warehouse.

Logistics and operating costs are rising

Seasonal demand almost always leads to an increase in operating expenses. A company may find itself needing to:

• hire temporary workers;
• pay for overtime shifts;
• increase the advertising budget;
• rent additional warehouse space;
• attract more vehicles;
• purchase packaging materials.

All of these payments must be made regardless of whether customers have already paid. For example, if the payroll totaled 1.2 million UAH per month and increased by 20% before the season, the company must find an additional 240,000 UAH each month.

Logistics costs may also increase by 15–30%, especially if the company handles international shipments or expedited deliveries.

Several factors are at play simultaneously

The most dangerous situation arises when all of the factors listed coincide, as shown in the table.

In this example, the company needs nearly 6.5 million UAH in additional funding before seasonal demand begins to generate revenue. That is why the causes of cash flow gaps are almost always cumulative in nature. Taken individually, each factor does not pose a critical problem. Together, however, they can temporarily deprive even a profitable company of the necessary liquidity.

How can you predict a cash flow shortfall before it occurs?

The best cash flow gap is the one you don’t have to close. CFOs often say that liquidity issues need to be identified at least 30–60 days before they arise. If a company discovers a cash shortfall on the payment due date, its room to maneuver is already significantly limited. That is why the payment schedule remains one of the key tools of financial planning.

Essentially, it is a forecast of all future receipts and payments, broken down by day or week. It allows you to see when funds from customers will be deposited into the account and when you need to pay supplier invoices, salaries, taxes, loans, and other obligations.

Let’s look at a simple example. In September, the company expects:

• Revenue from customers – 7.8 million UAH;
• payments to suppliers – 5.4 million UAH;
• wage fund – 1.1 million UAH;
• taxes – 620,000 UAH;
• Other operating expenses – 940,000 UAH.

Total payment obligations amount to 8.06 million UAH. The liquidity shortfall is 260,000 UAH.

If such a forecast is prepared one month before the start of the season, the company has enough time to review its procurement schedule, negotiate payment deferrals with suppliers, or secure external financing. If, however, the problem only becomes apparent on the payment due date, the range of available solutions will be significantly narrower, and their cost will be higher. That is why regular cash flow forecasting is now considered one of the key elements of a business’s financial stability.

How can you close a cash gap without harming your business?

When a forecast indicates an impending liquidity shortfall, a manager’s primary task is not to find money at any cost. It is far more important to choose a tool that will help the company weather the seasonal peak without compromising its financial stability.

Experience shows that companies that systematically manage their cash flows rarely rely on just one financing method. They typically combine several solutions depending on the size of the business, the duration of the cash gap, and the nature of their expenses.

Build up a liquidity reserve before the season starts

Financial experts recommend setting aside a reserve before it is needed. For small businesses, a cash reserve that covers 1–2 months of fixed expenses is considered optimal. For companies with a long production cycle or high seasonality, the reserve may amount to 3 months of operating expenses.

For example, if a company’s monthly fixed expenses amount to 1.5 million UAH, the desired liquidity reserve would range from 1.5 to 4.5 million UAH. This reserve is not used for growth or investments. Its purpose is different—to ensure the company’s uninterrupted operation in the event of delayed payments or a temporary decline in cash flow.

Review the terms and conditions for working with suppliers

Not all cash flow gaps need to be closed by raising additional funds. Some problems can be solved by revising the terms of cooperation. For example, if a company purchases goods worth 5 million UAH each month, extending the payment term by just 20 days effectively keeps over 3 million UAH in circulation. That is why large companies are constantly working to optimize their payment terms.

During negotiations with suppliers, it is important to discuss:

• extending the payment term;
• installment payments;
• partial prepayment;
• postponement of the final settlement;
• long-term contracts in exchange for more flexible financial terms.

Even a minor change in the payment schedule can significantly improve a company’s liquidity.

Reduce accounts receivable

Another source of savings lies within the company itself. If the average payment term for customer invoices is 60 days, and the company manages to reduce it to at least 45 days, the business effectively recovers a portion of its working capital. With a monthly turnover of 8 million UAH, a 15-day difference translates to over 4 million UAH that is returned to the company’s account sooner.

Various approaches are used for this purpose:

• discounts for prompt payment;
• automatic payment reminders;
• review of credit limits;
• monitoring of past-due accounts receivable;
• one-on-one work with the largest debtors.

A systematic approach to managing accounts receivable allows funds to be returned to circulation more quickly and helps maintain a stable cash flow without the need for additional financing. Even shortening payment terms by a few weeks significantly improves a company’s liquidity and expands its opportunities for growth. Regular monitoring of accounts receivable should be an integral part of a company’s financial management, especially during periods of active business growth.

Use external financial instruments

If internal reserves are insufficient, a business can turn to external financing. Each instrument serves a specific purpose—you can find the main ones listed in the table.

The choice of financial instrument depends on the specific cause of the cash flow shortfall. If the problem is delayed payments from customers, factoring may be more effective than a loan. If, on the other hand, the company is actively investing in its growth, financing the purchase of equipment would be a more appropriate option.

Payment in Installments as a Liquidity Management Tool

Many business owners view installment payments merely as a way to make a large purchase more affordable. In reality, its main advantage lies elsewhere. It helps prevent significant amounts from being withdrawn from working capital precisely when the business needs liquidity the most.

Let’s imagine a company that plans to purchase equipment worth 1.8 million UAH before the start of the season. If the entire amount is paid up front, working capital will immediately decrease by that same 1.8 million UAH. However, if the purchase is structured with payments spread over 12 months, the average monthly payment would be about 150,000 UAH. The difference is clear.

The company retains nearly all of its funds for:

• purchases of inventory;
• payment of wages;
• payments to suppliers;
• marketing campaigns;
• to cover the seasonal increase in logistics costs.

In fact, a business begins using the equipment even before it has paid for it in full. Future revenue gradually finances the investment, rather than the other way around.

This is exactly how eDilo’s installment plan for businesses works. The company is able to purchase the necessary equipment or goods without putting a significant strain on its liquidity. This is particularly important during periods of seasonal demand growth, when virtually every hryvnia of working capital is being used to grow the business.

For example, if a company plans to purchase 6 million UAH worth of inventory and another 2 million UAH worth of equipment at the same time, a one-time payment for all of these investments will require 8 million UAH in equity.

If, on the other hand, the equipment is purchased through an installment plan for businesses, the company can use most of its available funds to purchase goods that will begin generating revenue within the next few months. In this way, financial instruments become a tool for growth, rather than simply a means of payment.

Checklist: How to Prepare Your Business for the Peak Season

Cash flow shortfalls almost never occur suddenly. In most cases, the first warning signs appear several weeks or even months before a company faces a cash shortfall. By regularly analyzing cash flow, inventory levels, and the schedule of upcoming payments, most risks can be identified as early as the planning stage.

Therefore, it makes sense to start preparing for the season not when sales have already begun to rise, but at least one or two months before the expected peak. This allows enough time to adjust the budget, negotiate with suppliers, secure financing, and avoid costly last-minute decisions.

Before the start of the active season, there are a few essential steps you should take:

1. Use the payment calendar to forecast cash flow gaps at least 60–90 days in advance.
2. Estimate how much money will be needed to purchase goods, raw materials, or equipment.
3. Check the average time it takes for customers to pay their bills and identify the biggest debtors.
4. Assess your needs for additional staff, logistics, marketing expenses, and inventory.
5. Discuss with your suppliers the possibility of extending payment terms or arranging payment in installments.
6. Check to see if you have enough liquidity reserves to cover at least one month of recurring expenses.
7. If you are planning to make large purchases of machinery or equipment, determine the best financing method in advance so as not to reduce your working capital during peak periods.
8. Update your payment schedule every week and compare the forecast with actual receipts.

This algorithm doesn’t take much time, but it allows for much more precise liquidity management. Companies that regularly update their financial forecasts respond much more quickly to changes in demand, can scale their sales more safely, and are less likely to face critical cash flow shortfalls.

An increase in sales does not always mean an improvement in a company’s financial condition. On the contrary, it is precisely during periods of rapid growth that the greatest amount of working capital is often required. The faster purchases, inventory, and accounts receivable increase, the greater the strain on liquidity becomes.

That is precisely why the answer to the question “How can we avoid cash flow gaps?” begins not with finding money, but with sound financial planning. A payment schedule, cash flow forecasting, accounts receivable management, building reserves, and the timely use of financial instruments allow you to prepare for seasonal spikes in demand without posing critical risks to your business.

If a company is planning major purchases before the start of the season, it should evaluate not only their cost but also their impact on liquidity. In many cases, paying in installments through eDilo allows businesses to preserve working capital for operations while still acquiring the necessary equipment or goods without delaying growth. It is precisely this approach that helps businesses scale confidently, using future revenue as a source of investment funding without sacrificing current financial stability.