Cash Flow Tips for Seasonal Businesses
Seasonal businesses have to manage cash flow to weather the peaks and valleys of revenue over the year. That sounds like common sense, but it’s easy to lose sight of the long-term picture when things are going well. The best strategy for cash flow starts with small steps to reduce expenses and preserve capital. That way, you can make sure your livelihood sustains even when the cash isn’t coming in.
Know Your Peak Periods
Every business has some kind of seasonality, or peak periods when they do more revenue than other times of the year. If you own the type of business that simply can’t operate during certain months, you may shut down completely for several weeks. That may be true if you’re a landscaper in a northern state, for example.
Many companies operate year-round, but have severe fluctuations in cash flow. It’s essential to identify those key periods so you can anticipate when things are due to become slow again. Use your revenue records to narrow down those time periods when things are busy or quiet.
Prepare Annual Cash Flow Projections
Any business that relies on one or two peak periods should look a full year ahead when developing cash flow projections. This captures both the highs and lows that will happen in the coming months. While a business with stable monthly revenue can do a 6-month projection, a seasonal business could miss out on vital information. By not capturing half your annual cycle, you may fail to see when your cash drops off and be unprepared for a shortfall.
A rolling, 12-month cash flow projection lets you see well in advance when you’ll get a new influx of revenue, and when times are set to be thin.
Stick to a Set Budget
There may be a temptation to overspend when there’s a lot of money. But this can get you into trouble if all of a sudden you don’t have the cash you need to cover essential bills. Do your best to stay on track with a modest expense budget. That includes reducing the amount you have to spend to service high-interest debt. If you can, get a business line of credit or cheaper sources of financing than credit cards or high-interest loans.
Of course, it makes sense some of those expenses will have to rise when you are busier. You’ll purchase more inventory and hire more staff in anticipation of your peak periods. Any excess is best used to build up your cash reserves. A cash cushion of six months worth of expenses is ideal, so you can keep the doors open in the event your projections don’t pan out.
Manage Your Inventory
Inventory is one of the biggest challenges for seasonal businesses. If you can only sell for a few months of the year, you want to sell as much as possible. But if you manufacture too much merchandise, you can be left with a warehouse full of items that may or may not sell next year. Inventory can also become a tricky tax issue that leaves you with an unexpected bill.
So try your hardest to only prepare what you need. Develop strong relationships with suppliers, so you can buy only what you need — and can fill those last-minute orders for products in case there is a big rush of demand you want to satisfy.
Look for Alternative Revenue Sources
Whether you operate a fully seasonal business, or just have certain peak periods, there are ways you can use your existing resources to make additional revenue. Look to your existing equipment, office or warehouse space, and regular staff to see what else you can offer. Selling a new product or service when your core sales are slow can bring in much-needed additional money.
Think outside the box, but try to complement your existing business with a similar service. That landscaping business that creates beautiful gardens in the spring and summer might do well clearing snow in the winter. The display booth rental company that focuses on trade shows might expand to similar offerings for farmers’ markets or outdoor festivals.
Pay On Time, Get Paid Early
Cash flow is about managing when money goes in and when it goes out — so your bank account balances hopefully never get to zero. It’s an easy strategy to pay your bills on time, but as late as possible to give you more flexibility. That money can also potentially earn interest in your bank account. Negotiating good payment terms with suppliers can keep your balance sheet healthy and your cash flow positive.
At the same time, you want your customers to pay you right away. That’s easy with a cash business like retail, where goods and payment are exchanged at the time of the sale. It’s a bit more of a challenge with an invoice-based business. Those customers are like you — wanting to preserve their own cash flow by paying as late as possible but still on time.
Consider offering a discount for early payment. You can also sell your invoices to a factoring company. In this scenario, the factoring company buys your unpaid invoices in exchange for an upfront payment. When those invoices are paid, you get the balance, less a fee to the factoring company.
Keep Good Credit
Remember that note about staying away from high-interest debt? One of the best ways to do that is to maintain good credit. That’s not always easy, but effective debt management makes you better qualified for less expensive financing. That costs you less to service which means there’s more money available for the rest of your operations.
Stay On Track – Stay Positive
One of the benefits of being an entrepreneur is the freedom to be creative and flexible. That’s true when you run a seasonal business. By implementing sound practices like long-term forecasting, budget constraints, and new revenue source development, you can build a sustainable company you are proud to own and operate.
HB Hot Rods and Hogs was started by Ed Syer in the back of his auto repair shop in Huntington Beach where Ed was building