This month marks a transition for many seasonal small businesses. It can be a time to wrap up preparations for the busy summer season or to get ready to weather a major slowdown. Either way, for business owners whose companies generate the bulk of their revenue during specific times of the year, it is important to have a strategy to ensure sufficient cash flow during the off-season.
Poor cash flow is a key reason why many small businesses fail each year. Among successful small business owners, 49% say cash flow worries keep them up at night. If you run a seasonal small business, the following best practices can help you manage your finances during slow periods and keep your business healthy all year long.
Budget for seasonality.
Managing cash flow is critical to the financial success for any seasonal business, and budgeting can eliminate many of the cash flow issues small business owners face. It’s important to understand your fixed costs versus your variable costs and make sure you’re budgeting to cover them accordingly.
Note the times of year when you typically have the largest expenses. For example, your fuel and heating costs may be higher in the winter, which is your off-season, while your payroll is higher in the summer because you hire temporary employees. Focusing on the drivers behind each expense makes it easier for you to determine whether they are in alignment with your allocated budget.
Keep an eye on your cash.
The best way to improve your cash management is to track the flow of funds in and out of your business. Develop the habit of examining your finances at least monthly. Some small business owners review and analyze cash flow once a week in order to know where they stand. If you aren’t willing or able to take responsibility for ongoing cash management, hire an expert to handle this part of your business.
During your slow season, look for areas where you can cut expenses to a minimum. If you haven’t done this in a while, you’re likely to find some hidden costs that have crept into your budget without you even noticing. If your business drops off drastically during the off-season, you may want to consider closing your doors for a few months. Make sure you budget for your personal expenses during this time.
Create off-season demand.
In some cases, cutting costs may hamper your growth and the ability to gear up for your busy season. In addition to reducing expenses, investigate ways to earn more income during slow periods by diversifying into alternative products or services.
The key is to focus on who your customer is, not on what you currently offer. Your customers spend money all year long, so determine what they are buying and add it to the mix during your off-season. For example, an accounting firm can help a small business with bookkeeping or payroll. A retailer that sells beach-themed products can stock items geared towards fall and winter holidays.
Consider creating off-season demand through partnerships with other businesses or by offering deals to local customers. Look into opportunities to sell online. Be sure to test new items or services you plan to market to confirm there is demand and that you can meet the demand with your current resources.
Flex your workforce.
The ups and downs of seasonal supply and demand often make it impractical for small businesses to maintain a consistent payroll throughout the year. Hiring temporary help is a cost-effective strategy for managing the extra workload during peak periods.
A contract or temporary worker can provide the specific skills or services you need with a lower overhead cost. In seasonal positions, employees generally cost more because they are covered by a company’s benefits and insurance. Because you do not have to provide contract workers with benefits, you can expect annual savings of as much as 20 to 30%. You can further reduce expenses by staffing up with temporary workers during your busy season and letting them go when business slows down.
Strengthen your debt collection strategy.
Debt collection plays an integral part in any small business cash management strategy. For seasonal business owners, outstanding payments can put a serious crimp in your cash flow, so it is essential to get paid by your customers as quickly as possible. Issue invoices immediately, and examine your policies and terms to find ways to speed up the payment process. For instance, when extending credit to customers, you may need to tighten the payment timeframe from 30 days to 15 days.
Establish a debt collections process with set guidelines for following up with delinquent customers. For example, at 30 days you’ll send a written reminder, at 60 days a junior staff person calls the customer, and at 90 to 120 days the owner makes the call. You may have requested payment from the customer numerous times without results, but a call from the top executive is likely to be taken more seriously. You can also use small business accounting or invoicing software solutions to send invoice payment reminders and help track delinquent accounts.
Secure business financing.
Even the most successful seasonal businesses can run short of funds. Business financing is a valuable tool for ensuring that you have stabilized cash flow, which makes it a vital year-round cash management strategy.
Seasonal businesses often look for short-term loans when they are stretched. These are generally more expensive than long-term loans and often have higher annual percentage rates (APR) and origination fees that are spread out over a shorter period of time. Some lenders, such as those offering merchant cash advances, may require repayments daily or weekly as opposed to monthly, which can be challenging for seasonal business owners to keep up with.
Summit Financial Resources offers a number of options, including invoice factoring, asset-based lending, and inventory financing programs, that allow small businesses to harness the cash in their accounts receivable to smooth out cash flow and pay bills during slow times. The invoice factoring process is simple: we give you a line of credit using your outstanding invoices as collateral, and your loan is repaid as your customers pay those invoices. Our custom financing solutions feature reasonable rates and offer the flexibility to access the funding when you need it. You can take advantage of opportunities to fuel growth during the busy months or cover expenses during your slow season.
Seasonal small businesses can generate substantial revenue and offer entrepreneurs plenty of flexibility. However, it takes careful planning and solid cash management skills to ensure steady growth and profitability.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.