How to Control Cash Flow in Your Seasonal Business
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Cash flow consists of all the money coming in and out of a business. Management of cash flow is critical for corporate success because every business has bills to cover, debt to repay, and investments to make. Seasonal businesses are companies that only sell products or services during a particular time of year. Since there are an ebb and flow of income in a seasonal business, they are more susceptible to cash flow issues. Thankfully, there are ways to control cash flow to ensure that your business survives periods of low income.
Every business experiences some degree of seasonality, being prepared for cash flow issues, in any case, is wise. In this article, we will explore what cash flow and seasonal businesses are in-depth, how cash flow can be optimized, and what you can do during tough financial times.
What is Cash Flow?
Cash flow is the movement of money within a business, both in and out. Money coming into a business would be from sales, tax returns, earned interest, and other income. Money coming out of a business would be expenses, payroll, tax payments, and other payables. Ensuring that a business has enough money coming in to cover their upcoming expenses is crucial for successful operation.
If cash flow is not properly managed, it can result in negative cash flow, default on payments, or worse, business failure. Negative cash flow occurs when a business is spending more money than they are bringing in. When negative cash flow occurs, defaulting on payments is likely to occur. The more payments a business defaults on, the more probable business failure becomes.
What is a Seasonal Business?
A seasonal business is a company that sells products or services that are only consumed during a particular time of year. A couple of examples include amusement parks, Halloween stores, snow removal, ice cream shops, and pool maintenance companies. These products and services have a clear season in which they are in demand and the opposite would be the offseason.
Seasonal businesses are more prone to cash flow problems because for part of the year they earn little to no income. Despite the lack of income, debt payments and other bills still need to be paid on a regular basis. This is precisely why seasonal businesses need to pay particularly close attention to their cash flow.
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Understand Your Cash Flow Cycle
In order to optimize your cash flow as a seasonal business, it’s important you understand your cash flow cycle. Forecasting revenue and expenses can help you understand the highs and lows in your business. Your forecast will tell you exactly which months you’ll experience low revenue and high expenses. At least every year you should refine your forecast with new information you’ve gathered.
Through projecting your inflows and outflows, it may become apparent that you require financing. Recognize the issue and act accordingly, using financing is quite common for seasonal businesses. It’s better to get the financing your business needs now instead of waiting until it’s too late.
Bills, Bills, Bills
Even when your cash flow is hurting, bills still need to be paid – as annoying as that may be. It can help to differentiate your fixed and variable expenses. A fixed expense is a bill amount that doesn’t change when production or sales increase or decrease. Rent, insurance, debt payments, and salaries are examples of fixed expenses.
On the other hand, variable expenses alter when production or sales fluctuate. Utilities, raw materials, packaging, and hourly labour are examples of variable expenses. Variable expenses are more difficult to forecast because they’re irregular and depend on production and sales. Forecasting both fixed and variable expenses can help you manage your cash flow.
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Negotiate Better Contracts
Do you want your bills to be lower? Of course, you do. One way to reduce your expenses is to negotiate better contracts with your vendors. Vendors don’t want to lose your business to a competitor, they’d rather forgo income and keep your business. With this in mind, you can ask for a lower price or rate. In addition, you can ask for more lenient payment terms to allow for more time to pay.
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Your vendors will reduce rates and extend better payment terms to you, you should do the same for your customers. Another program you can implement is discounts for customers who pay on time and penalties for customers who pay late. You may also want to consider invoice factoring as a way to bridge the gap between when you invoice other vendors and when they pay up.
In your business’ offseason, you’ll have ample idle time. With this time, you can increase your sales by changing or updating the inventory you offer. Other ways you can increase sales is through marketing investments, expanding your target market, and increasing the price of your product or service. Don’t be shy – use your creativity to make more money.
Business Line of Credit
A business line of credit is one of the most favourable financial products a seasonal business can have. Every business incurs usual large purchases, unexpected expenses, or a lower than expected revenue for a period. A line of credit can help a business survive in situations like these.
Business lines of credit tend to have low-interest rates and flexible repayment terms when compared to other financial products such as credit cards or loans. Even if you don’t have a need for a business line of credit now, it’s wise to obtain one so you’re prepared for the unexpected.
Prepare for the Worst and Hope for the Best
Budgeting and analyzing cash flow are excellent strategies for planning and preparing for the worst. Of course, you want the best for your business, but it’s better if you’re prepared for the worst. Even when you’re in the low season, preparation will make it feel like a high season.
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