Managing cash flow can pose a significant challenge for seasonal businesses as they generate most of their income during a fixed period but will often have outgoings at other times. Experiencing large swings in revenue can leave businesses vulnerable to shortfall if their cash flow is not managed correctly.
In fact, an incredible 82% of failed businesses blame cash flow issues as a factor in why they failed. While some businesses generate sufficient income during peak periods to carry them through off-peak phases, if revenue goes up and down on a seasonal basis, you must ensure you’ve nailed down the basics. This means:
- Knowing your fixed and variable costs on an ongoing basis
- Tracking your sales in busy periods
- Knowing where to cut back in terms of variable costs
- Having the information for an accurate forecast
- Your budget includes areas where you can make regular savings to cover costs
- Comparing season by season, year on year, to get an accurate picture of your cash flow situation.
Once you’ve covered the basics, you can look at other ways to manage your cash flow effectively.
Create a Thorough Cash Flow Forecast
When you have a seasonal business, you must create an accurate cash flow forecast to identify your slow and busy seasons and plan ahead for any shortfall. However, ensure you are realistic with your forecasts and avoid overestimating peak season revenue or underestimating your off-season expenses. If you have a new business, use research of your competitors to project your sales. You should regularly update your cash flow forecast, ideally at the end of each month, to reflect the ongoing changes in your business.
Consider Options for Business Financing
Ideally, you’ll build up sufficient funds to see you through off-peak periods and keep your cash flow stable. However, one way to get through the less profitable periods is by using a business credit card that will give you access to credit when needed.
Damian Brychcy, COO of Capital On Tap says, “You can use a business credit card to cover costs during the off-season and pay it off when your cash flow improves during the peak season. Some business credit cards also offer cashback and reward points, while others have lower interest rates which can help you save money.”
Regularly Review Your Stock
If your business carries stock, you must manage it effectively. This means avoiding overstocking, as this can tie up your money which you cannot use to pay bills. Keep a close eye on any slow-moving items; you may have to adjust stock levels during the off-season to lower your expenses or sell less popular items at a discount.
Develop Good Relationships with Suppliers
Find suppliers you can work well with, build on your relationship with them during busy times, and pay your bills on time. This will put you in a good position to talk to your suppliers about securing discounts for bulk buying and favorable payment terms. You may be able to negotiate longer payment terms to delay your outgoings and improve your cash flow.
Encourage Prompt Customer Payments
While as many as 49% of invoices sent out by businesses will become overdue, some will also become uncollectible. While many businesses are hesitant to chase customers over unpaid invoices, getting paid on time is an important way for businesses to manage cash flow. Get into the habit of sending out invoices promptly and consider offering multiple payment options, for instance, offering a discount for early settlement or setting up discounts on purchases for upfront part-payment.
Damian Brychcy, COO of Capital On Tap advises, “Whatever route you take to incentivize prompt payment, you must be clear in your settlement requirements and follow up promptly on late payments. This will help your business maintain a healthy cash flow and reduce the risk of bad debts.”
Regularly Review Your Year-Round Expenses
As a seasonal business owner, you will likely see certain costs go down significantly at certain times of the year, such as employee costs. However, other costs may occur all year round. Review all the small, regular payments the business makes each month and whether they are needed during the leaner trading periods. For instance, if you’re paying for utilities monthly, you may find that there are more suitable tariffs that will let you manage your payments more effectively, such as every quarter. Likewise, you may have leasing costs for vehicles or equipment you don’t use for certain periods of the year. Consider whether you can renegotiate any year-round expenses to help you manage your business’s long-term cash flow.
Managing cash flow for a seasonal business is crucial for its long-term success. By understanding what’s coming in and going out of your business every month, you’ll be in a stronger position to keep good control over your business’s cash flow and ensure the long-term financial health of your seasonal business.
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