How to Manage Cash Flow for a Seasonal Business
Some small businesses live and die by the ebb and flow of seasonal shoppers. One month, there's a line out the door — and then suddenly, sales drop to a trickle.
Although this pattern is typically anticipated, many companies still fail. Closures often occur because owners do not know how to manage cash flow during these predictable peaks and valleys.
Whether you are dependent on holiday shopping sales, summertime foot traffic or another seasonal uptick in customers, practicing the following three tips can put your business on solid ground all year-round.
1. Diversify Your Business
With employees to pay and overhead costs to cover, businesses need steady income streams to thrive. Unfortunately, that is a luxury many seasonal business may not have. Instead, you should proactively plan ahead and understand how to manage cash flow during yearly economic downturns. Even though your revenue may create a surplus during the busy season, it may not cover expenses during the subsequent slow down.
Smart seasonal businesses diversify their products or services to keep income levels constant throughout the year. For example, a country club may switch its focus to hosting holiday parties during the off-season. A strategy like this provides a secondary income stream that can make a big difference when times are tight.
2. Budgeting and Forecasting
Since revenue is rarely constant for seasonal businesses, the success of your company is likely dependent upon solid budgeting and financial forecasting. By projecting income and expenses throughout the year, you can better anticipate highs and lows in advance.
For example, a retail store may experience a 30 percent spike in sales during the holidays. In order for this type of business to survive all year-round, it should save a significant portion of its revenue, which can be used to pay expenses during less profitable times. Many seasonal businesses use this surplus to build an emergency fund, which they can dip into when resources are especially low.
Your company could also benefit from forecasting its income at various times of the year. By routinely performing a cash flow analysis, you can maintain a firmer grasp of your yearly financial outlook.
3. Flexible Business Model
If your income expands and contracts throughout the year, you can also benefit from developing a flexible business model. For example, many retail businesses hire temporary, part-time workers during the holiday season. This strategy allows them to cut their payroll during leaner times to help meet mandatory expenses, like rent and utilities.
As a seasonal business owner, you may need to continually identify new revenue streams to help outset costs. For example, a popular business practice today is to create a membership club that gives discounts to participants. By nurturing relationships with customers, you can build your recurring revenue streams.
In order to balance your business' books, financial literacy is crucial. You can benefit from understanding how to read a balance sheet and learning how to perform a cash flow analysis. Knowing how to manage cash flow with these basic financial tools can help you ride the ups and downs of running a seasonal business.