Tips For Managing Seasonal Cash Flow
Cash flow management is a crucial aspect of running a small business. But if your business heavily relies on the changing seasons — e.g., retail, agriculture, and tourism — you may experience cash flow problems throughout the year due to fluctuations in your revenue and expenses. This means you could have trouble paying bills, purchasing inventory, and covering other expenses during the off-season. However, careful planning allows you to manage your cash flow efficiently and avoid cash flow issues during seasonal fluctuations.
Table of Contents
Identify your peak season and off-season
The first thing you should do is identify your peak season and off-season. You may already have a general idea of when these times occur. For example, if you have Christmas-related business, your peak season will obviously be fall and winter, while your off-season will be post-holiday months.
However, you need to pinpoint the exact start of the upward curve towards the peak and the downward curve towards the off-season, which can take some research or experience. If you’re an established business, review your historical data and isolate the months with higher revenues and lower expenses, and vice versa. If you’re a startup, you may need to look at competitive research to forecast your revenue and expenses.
Understand your expenses
Examining your expenses is an excellent strategy to help manage your cash flow. You need to consider two types of expenses: fixed and variable.
Fixed expenses remain constant regardless of the level of sales or production output. These expenses are typically regular ongoing costs necessary for the business to operate, such as rent, salaries, business licenses, insurance, and utilities. Fixed expenses are usually in the form of contractual agreements, such as a lease or a loan.
On the other hand, variable expenses fluctuate based on the level of production or sales. These expenses are typically directly tied to the amount of product or service that a business is producing or selling. Examples include the cost of raw materials, packaging, shipping, and commission paid to salespeople.
By carefully tracking and managing these expenses, you can effectively manage your cash flow and make informed decisions about pricing, production levels, and other aspects of your business.
Check your inventory
In addition to your business expenses, you should as closely monitor your inventory levels. Carrying excess inventory can tie up cash and lead to cash flow issues. Regularly perform an inventory audit to pinpoint low-selling or obsolete items, then create an action plan to liquidate or dispose of them. To streamline your inventory management, consider investing in inventory software that helps track inventory levels and optimize ordering processes. As a result, you can help minimize excess inventory and reduce the cost of carrying inventory.
Increase sales during peak season
One way to help weather slower financial periods is strategically increasing your revenue during peak season. To make this work, find out how much you need to sell to compensate for the off-season, then strategize ways to achieve this goal. Offering discounts or promotions — e.g., free delivery, BOGO sales, etc. — can be an effective strategy to attract customers and boost sales. Additionally, look back at your business history and see what worked and didn’t work during the last peak seasons, and plan accordingly to maximize successful strategies and fix the issues from previous peak seasons.
Stay on top of your invoices
Proper invoice management is key to cash flow management because accurate, prompt invoices can help you accept payments on time. Even if you send timely invoices, customers may delay payments, which can cause cash flow issues for your small business. Chasing payments can be time-consuming, so consider invoice software to help get paid faster. Features like recurring invoices, automatic reminders, and credit card processing make it easy to keep your cash flow healthy and manage bookkeeping for your products or services.
Use accounting software
Manually tracking your cash in a spreadsheet takes a lot of time and effort. Instead, streamline your cash flow management by utilizing accounting software. Many platforms offer a cash flow forecasting tool, which uses your business bank account and software activity to predict money-in and money-out months in advance. You’ll get your business’s full financial picture right on your dashboard so that you can monitor all your business balances in one centralized location.
Seek professional help
If you need assistance during the off-season, seek professional advice from a financial expert or accountant to help manage your cash flow during seasonal fluctuations. They can guide budgeting, analyzing financial statements, forecasting cash flow, and managing accounts receivable and accounts payable. While you may include this assistance as part of your variable expenses, it’ll pay for itself since you’ll improve your financial management practices and navigate the off-season challenges moving forward.
Consider a business line of credit
Although you may do your best to monitor your cash flow, there are instances where you need to make a substantial purchase, encounter an unexpected expense, or experience lower-than-expected revenue. To help endure these unforeseen costs during the off-season, you might want to consider a business line of credit — a type of financing that allows you access to a predetermined amount of funds on an as-needed basis. Work with your banker to determine if you qualify for a line of credit and if it’s the right decision for your small business.
With these tips in mind, your small business can endure slower financial periods and manage cash flow efficiently and effectively.