The holiday season can be the most wonderful time of the year for small business owners, and it can also be the most stressful time. Black Friday may kick off the peak period in your sales cycle or mark the start of your slow period. If your small business generates the bulk of its profits during a specific time of the year, it’s important to have a cash-flow management strategy.
Cash is the lifeblood of every successful business, and poor cash flow is a key reason why many small businesses fail each year. Seasonal business owners in particular need to employ tactics to ensure sufficient cash flow during the off-season. These seven best practices can help you manage your finances during the holidays and keep your business growing all year long.
1 – Develop a cash flow forecast.
A good cash flow forecast is an essential tool that projects your income and expenses throughout the year. This makes it a valuable tool for helping you spot potential problems before they occur and take steps to mitigate them. Most accounting software programs include cash flow forecast reports that you can create based on your existing accounting data.
Be sure to focus on structuring expenses so they fit the revenue available for the season. 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. You will also need to save part of your earnings during the busy time to cover off-season expenses.
2 – Keep track of your cash.
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.
3 – Reduce expenses.
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. Many seasonal businesses hire employees only during the busy times and lay them off when the season ends. If your business drops off drastically during the off-season, you may want to consider closing your doors during that time. Make sure you budget for your personal expenses during the closure.
4 – Strengthen your collection strategy.
Debt collection plays an integral part in any small business cash management strategy. Studies show that the cost of unpaid small business invoices is over $825 billion, and outstanding payments can have serious consequences for seasonal businesses. 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. Incentivize customers by making it attractive and easy for them to pay you. Consider offering early payment discounts, like taking 10% off the invoice amount if a client pays within 30 days. You can also discourage late payments by charging a late fee.
Establish a debt collection process for following up with delinquent customers and stick to it. For example, some businesses send a written reminder at 30 days, have a junior staff person call the customer after 60 days, and at 90 to 120 days the owner makes the call. You may have requested payment numerous times without results, but a call from the top executive will 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.
5 – Manage your inventory.
Any inventory left at the end of the season is like money sitting on the shelf. Excess inventory should be marked down and sold to increase off-season revenue and reduce carrying costs. Some suppliers might allow merchandise to be returned for a credit against next season’s orders. It’s also important to gauge when to stop purchasing new inventory. The holiday season may be a time when your business is high in receivables and low on inventory, but you want to avoid any additional expense at a time when you don’t have cash coming in.
6 – Have a financial cushion.
Business financing is a valuable tool for managing your 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. Our custom financing solutions feature reasonable rates and offer the flexibility to access the funding when you need. You can take advantage of opportunities to fuel growth during the busy months or cover expenses during your slow season.
No matter which option you choose, work with a lender who takes the time to understand your seasonal small business and provides the financing you need to keep things running smoothly through the inevitable ups and downs.
7 – Be strategic about growth.
Launching an expansion initiative can be exciting. However, wise entrepreneurs manage their small business growth strategically. Scaling your seasonal business too quickly can create cash flow challenges, as increased demand for products and services results in increased costs for space, inventory, production, and payroll.
Take advantage of growth opportunities, but use your cash flow forecast to determine what it will take to pay back any debt incurred to expand. Following a path of careful, calculated growth includes making sure that you can boost cash flow as needed to keep your strategy on track.
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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.