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Keeping cash flow in check is a challenge for every business owner. In fact, cash flow challenges represent the number one reason that small businesses fail—including businesses that are on track for long-term profitability.
No matter how successful your business is on paper, if you don’t have the necessary cash on hand when rent or payroll is due or when you need to make your next inventory order, your business can’t survive.
For businesses whose revenue streams face strong seasonal ups and downs, however, this challenge is an altogether more difficult one to address. It requires extreme diligence, preparedness, and an awareness that things won’t always go according to plan.
Seasonal business owners carry the responsibility to be far more organized and disciplined than their peers in order to account today for challenges and opportunities that may arise as much as 8 to 12 months down the road. That’s just not an issue that year-round business owners typically have to deal with.
There is some good news to this challenge, however. Seasonal business owners who master cash flow management under these difficult circumstances are poised to build some of the most financially healthy businesses around.
To help you master the cash flow mystery for your seasonal small business, check out these 11 tips that will help you plan ahead.
The key to financial success for any seasonal small business starts with an in-depth analysis of your cash flow situation. Until you fully understand how and when money flows into and out of your business throughout the year, any steps you take toward better cash flow management are ultimately just a guessing game.
Before anything else, properly managing your cash flow should start with putting together two key financial documents: your statement of cash flow and your expense forecast statement.
Unlike your business balance sheet or profit and loss statement—each of which only represent a given point in time—a cash flow statement shows how and when money flows into and out of your business over a longer period.
If you’ve never prepared a cash flow statement for your business before, it’s a good idea to review past income and expenses over the course of at least an entire year—and ideally for the past two to three years whenever possible.
Some accounting software programs offer cash flow statement among their reporting options, or you can use Fundera’s ready-made cash flow analysis template to generate your own cash flow statement.
Preparing your business’s first cash flow statement can be time-intensive process, so it’s a great chore to take care of during your business’s offseason. But once you’ve done the work to create this document for the first-time, it will be easy to maintain in the future—and the knowledge you gain can make the difference between success and failure for your seasonal business.
Once you have a detailed record in hand of your business’s cash flow ups and downs from years past, you’ll be much better equipped to forecast the expenses that are likely to arise over the course of your next offseason.
In many ways, your expense forecast statement will look very similar to your cash flow statement. The main difference? Your statement of cash flow is an analysis of past transactions, whereas a forecast is by definition an educated guess about what you can expect from your cash flow needs in the future.
As you create your expense forecast, pay special attention to pre-season expenses that will arise just before your busy season starts, such as inventory purchases or early staffing requirements.
This is often the time that a seasonal business’s expenses are highest, and because it’s the time farthest out from your last high season, it might also be the point when cash flow reserves have hit their limit. Anticipating and setting aside separate funds for these preseason expenses will help you avoid running out of capital in those last weeks before sales volumes rise again.
Regardless of seasonality, unexpected expenses are a reality of business ownership. The leaky roof of your storefront. The damaged batch of inventory that requires replacing. The project that takes far longer than expected, forcing you to pay overtime for personnel to get things just right. These factors are a reality of doing business, and seasonal business owners in particular don’t have the luxury of pretending that these unanticipated costs won’t come up.
A year-round business owner might have the option of quickly expanding a product or service to make up for lost profits. But when a seasonal business owner faces a large expense during the off season, it can take months to recoup that cost through earned income. That means you have to go above and beyond in planning ahead so that when the unexpected happens, you’re not left scrambling to figure out what to do.
Here are three ways that you can anticipate the unexpected within your cash flow management plan:
Planning for the unexpected as a seasonal business owner starts with an earmarked emergency fund. At minimum you should set aside one month of average business expenses—and many cash management experts recommend working toward a three-month emergency fund.
Of course, establishing and maintaining an emergency fund sounds like simple advice, but it requires discipline. To keep yourself accountable and avoid dipping into this cash for every seemingly must-have opportunity that comes along, consider writing strict standards for yourself about what constitutes an emergency worthy of depleting this separate fund.
Entrepreneurs are notoriously optimistic bunch. In many ways this is good news, as it allows seasonal small business owners to endure the ups and downs of day to day operations without becoming overly discouraged. That said, this natural optimism can also lead small business owners to consistently underestimate future expenses while overestimating future sales volumes.
That’s why, upon completing your business’s expense forecast, it’s a good idea to add in a contingency category equivalent to 20% to 30% of your total expenses. Whereas your emergency fund is designed for large and one time unexpected costs, this contingency budget will account for the nicks and cuts of small expense increases caused by inflation, increased shipping costs, or price changes on certain goods.
Ideally, you’ll able to prepare be truly accurate off-season expense forecast in the first place—but there’s no harm in leaving yourself a margin of error. In the event that your contingency fund goes unused, it can let you take advantage of last-minute growth opportunities or even be distributed as additional profits.
Even with a contingency budget and a hefty emergency fund in place, there’s still room for the truly unexpected to de-rail your business’s cash flow. What would you do if your retail space was impacted by a flood or a fire during the off season and insurance didn’t cover the full expenses? What if you suddenly had to replace a major piece of equipment that you use from year to year?
Many small business owners would seek a short-term cash flow loan in this instance, but these so-called emergency loans come with exorbitant interest rates. This is particularly troublesome for seasonal business owners, since a cash flow emergency early in the off-season could leave you accruing this expensive interest for a long while before you can bring in enough revenue to make full repayment.
For this reason, accounting professionals often recommending that seasonal small business owners maintain an open business line of credit. With this credit model, you can take your time to shop around for a low-interest business line of credit. You want one with excellent terms at the beginning of your offseason, giving you the peace of mind that funds are available when you need them without your having to pay a cent unless you actually use the funds in question.
As long as you never draw upon your line of credit, no costs are associated with having the funding available—so there is truly no downside to keeping this option in your back pocket. Remember, though, that the right time to apply for a business line of credit is before you need the funds—so go ahead and check this off your off-season to-do list as soon as you can.
You’ve done the homework to better prepare for strong year-round cash flow management and even made contingency plans for the unexpected. But what can you do to actually minimize those cash flow ups and downs?
Let’s look at a few ways you can make the most of your seasonal business model in order to maximize your annual profits:
When year-round business owners sign a lease or hire employees, they face far less concern about spending thousands on retail spaces that sit empty or payroll for employees who don’t actually have much work to do. As a seasonal business owner, however, this challenge must factor into every expense decision you make.
If you’ve operated a seasonal business for a while, you’ve likely already addressed this concern as it relates to employees or your physical space. You’re used to hiring part-time employees for only the high season of your business, making it clear that there’s an end date to the work period when your busy season ends. You may even have found ways to sublease office or retail space during the slower months.
But what about smaller day to day expenses—things like your utilities or even software subscriptions for tools that you only really use during the peak season? Those $10 to $100 per month expenses may not seem like much in the grand scheme of your business, but they add up over time.
Conduct a thorough audit of your business’s year round expenses, and look for small ways to reduce costs that could add up to a big difference. And if you do have more year-round employees or more office or retail space commitments than you need, it might be time for some hard conversations in order to reduce those off-season costs.
While the extreme ups and downs of running a seasonal business may present as a challenge that has to be overcome, there are actually some potential upsides to your seasonal business model—if you learn to use those to your advantage.
Are you making the most of the time available to you in the offseason?
With self-discipline and a little bootstrapping, you can benefit from unique opportunities to DIY aspects of your business during those slower months that you might otherwise have to outsource for a hefty fee. Take a graphic design or online marketing course, then use that off-season downtime to design your own marketing assets and put together a promotional plan for your business.
This is also a great time to shop around for lower cost suppliers or to save on shipping or other costs by ordering materials or inventory that you need well in advance.
Planning ahead and minimizing expenses can go a long way toward better managing cash flow for your seasonal business—but at a certain point, there is simply no replacement for having multiple streams of revenue. How could you diversify your products or services in order to balance out income between high and low seasons?
For a hospitality business in a seasonal tourist location, that could mean doubling as a conference or retreat center during the slower months. If you have a seasonal service business, think about complimentary services for which there may be more demand during slower months of the year.
And remember, your secondary income stream doesn’t necessarily have to be directly related to your core business and brand. Launching a subsidiary or even an entirely separate second business could allow you to make use of the same team, skill sets, and resources in a completely different way.
There’s no denying that when it comes to cash management, seasonal small business owners have a unique set of challenges to contend with. But if you can do the work during your offseason to conduct a thorough cash flow analysis and forecast, line up your savings and contingency financing options, and look for ways to balance out off season revenue and expenses, you have the potential to build a business poised for a long-term growth and sustainability.