If your small business is seasonal, you know how difficult it can be to maintain sufficient cash flow. Manufacturing and sales slow down or even cease in the off-season, while the rent or mortgage, insurance, taxes, utilities, and salaries still need to be paid. Right now, business owners who generate the bulk of their profits in spring and summer are facing the challenge of covering expenses like inventory, displays, and marketing ahead of the season.
At Summit Financial Resources, we see cash as the lifeblood of a successful business. To ensure sufficient cash flow during slower sales periods, it’s important for seasonal business owners to focus on cash-flow management all year long. Here are five tips to help you plan strategically and stay on track.
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1 – Forecast Your Cash Flow
A good cash flow forecast helps offset uncertainty by projecting your income and expenses on a monthly and yearly basis. This will allow you to budget accordingly and eliminate many of the cash flow issues seasonal businesses face.
Create a log of the payments you will need to make such as wages, rent, loan repayments, and taxes. Then list the cash that will be coming into your business, including customer payments as well as interest on savings and tax returns. Subtract outgoing cash from incoming cash to calculate how much money you will have on hand at any given time.
To manage your cash flow effectively, you need to keep an eye on your cash position on a regular basis. Track the flow of funds in and out of your business, and develop the habit of analyzing your finances at least monthly. Some small business owners review cash flow once a week in order to know where they stand. This enables you to respond quickly when you see cash problems coming and plan for large seasonal expenditures like purchasing inventory, hiring new staff, or expanding your marketing campaign.
2 – Plan Your Expenses
To pay off-season expenses, you need to save some revenue during your busy season. You also need to plan for higher expenses. Consider structuring expenses so they fit the revenue available. For example, arrange with vendors to accept larger payments when cash flow is high and lower payments during slower times of the year. Ask the owner of your building if you can pay more during your peak season and less the rest of the year. Many seasonal businesses hire temporary employees and lay them off when sales slow down.
During your off-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 discover hidden costs that have crept into your budget without you even noticing. If your business drops off drastically during the off-season, it may be wise to temporarily close your doors. Make sure you budget for your personal expenses during the closure.
3 – 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 like Xero and Wave to send invoice payment reminders and help track delinquent accounts.
4 – Manage Your Inventory
Leftover inventory is like money sitting on the shelf. Sell extra merchandise at a discount when your season comes to an end. The additional revenue helps your cash flow more than paying to store the inventory. Some suppliers might even allow you to return merchandise for a credit against next season’s orders. If you run a seasonal service business such as landscaping or pool maintenance, offer discounts as the peak season draws to a close.
It’s also important to gauge when to stop purchasing new inventory. Your business may be high in receivables and low on inventory during late spring or summer, but you want to avoid any additional expense at a time when you don’t have cash coming in.
5 – Secure Business Financing
Business financing is a valuable tool for managing cash flow during the off-season and all year long. Seasonal businesses often look for short-term loans when they are stretched, but 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 a monthly basis, 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 so you can take advantage of opportunities to fuel growth during the busy months or cover expenses during your slow season.
If you are looking for business financing, waiting until the last minute may limit your options. Be proactive and find out exactly what your lender will need to get the process started and have financing in place before you need it. No matter which option you choose, work with a lender who takes the time to understand your seasonal small business and provide the financing you need to keep things running smoothly through the inevitable ups and downs.
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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.