Many businesses are seasonal: Retailers rely on end-of-year holidays.
Resort businesses peak during summer vacations. Back-to-school is a boon to kids' apparel firms. This is why accounting for seasonality is — for many small businesses — essential for an accurate cash flow forecast.
"By some estimates, around half of all small businesses experience some seasonality in their businesses, which means sales can be extremely busy during some periods of time and much slower during others," says Susan Scherreik, founding director of the Center for Entrepreneurial Studies at Seton Hall University. "Think of health clubs' seeing a rush of new members in January, prompted by New Year's resolutions."
Seasonality helps make accountants especially busy during tax season. It also idles lawn care companies in winter. It means holiday-oriented businesses are slow except around the appropriate holiday. And that seasonality is important because of its effect on cash flow. "Managing cash flow is crucial to the good health of all small businesses, period," Scherreik says.
Scanning for Seasonality
Step one in managing the seasonality effect on cash flow is to identify and measure it. Scherreik urges business owners to review past annual cash flow statements, looking carefully for peaks and valleys in revenues. "The good news is that tracking swings in cash flow has never been easier, thanks to the many accounting software programs like QuickBooks Online," she says.
It's important to focus on the timing of your cash flow, not just the sales, stresses Brad Sugars, chairman and CEO of Las Vegas-based business coaching company ActionCOACH.
“When you're looking at seasonality, it's about cash flow”
- Brad Sugars
Chairman and CEO of ActionCOACH
"That's always 90 days different from when sales are made. So, plan based on cash flow, not just when sales are made," Sugars says.
Forecasting seasonal cash crunches helps set the stage for practical remedies. "Once the entrepreneur has a solid sense of the swings in revenues, he or she can take further steps to effectively manage during both the upswings and the down periods," Scherreik says.
Building up an off-season savings fund is one effective way to cope with seasonal cash flow fluctuations. "Strive to have six to eight months' worth of business expenses in savings to help you weather the slower periods," Scherreik says.
Credit is another line of defense in handling seasonality. "The predictable seasonal variation in cash flow can usually be managed through a combination of inventory management or floor planning, supplier-provided financing via trade credit, and backup lines of credit," says James Brown, chair of the finance department at Iowa State University.
Controlling cash outlays also helps deal with seasonality. Many businesses seek to reduce labor costs by reducing staff, Brown notes, but they shouldn't stop there.
"This is seldom sufficient, in and of itself, and firms need to be careful with this approach, because there are often substantial costs associated with hiring and firing workers, and these costs can more than offset any short-run benefits that firms accrue," he says.
One high-impact way to trim cash outlays during an off-season is to avoid cutting big checks during the predictable downturns, Sugars says. "Look at your annual expenditures and make sure that they're in the good time of year, not the bad time of year," he advises.
Encouraging Positive Cash Flow
Businesses can manage seasonal slumps by encouraging positive cash flow, as well as by minimizing the cash that goes out. Many small businesses hold discount sales to boost off-season demand. Others encourage faster conversion into cash of the sales they do make.
"Try to extend your own payment terms to suppliers, while providing incentives for your customers to pay quickly," Scherreik urges. “That way, you maximize cash flow in and minimize cash flow out."
Small businesses that are subject to serious seasonality might consider offering related but counter-seasonal lines of business. "Think of other ways that you can generate income," Scherreik says. "For instance, if you own a food truck that is busiest during weekends, or in the summer and fall, leverage the business's reputation by renting a space to offer cooking classes during the winter months or during the week."
Most seasonal cash flow management tools apply to nonseasonal businesses as well. And, just as with any other business, the key is to prepare ahead of time. For example, Scherreik says, "Taking out a lines of credit, or a bank loan is a prudent idea. But do this before you think you will need that line of credit or bank loan, which will make obtaining outside financing easier."
A relationship with a small business banker can help you access insight and resources to manage through seasonality and other business issues. Find one near you today.