Secrets to Managing Cash Flow in a Seasonal Small Business

By Allen Bell and Allison Goldman

Anyone who manages a small or medium-sized business knows that cash flow management is paramount to keeping an organization stable and can be one of the most important tools to scale a business. Now add the complexity of a seasonal business, and the need for disciplined cash flow management becomes even more significant. Most experts advise having a closely monitored cash-flow measurement system and then suggest methods for modifying arrangements for accounts receivable and accounts payable.

Our company, SeaTurtle Sports, is a seasonal business, and we knew early on that cash flow management would be challenging. When accelerated growth added more financial pressure, we were forced to be less conventional and more creative to ensure operational expenses were paid on time and inventory levels were sufficient entering our high seasons.

Managing cash flow in a seasonal business

With any seasonal business, your key objective is to position your company well for the critical months that may have to carry your business for the rest of the year. The following are a few tips from our experience to assist in business decisions for both a short- and long-term cash flow management strategy:

1. Look at transactions from a net profit, margin, and cash flow perspective

With any small business, product or service based, typically direct sales are the ideal. They lead to larger margins and developing relationships with your end consumers. At our company, we too prefer direct sales and those healthy margins over wholesale. Our larger wholesale orders have lower net profit and margins compared to direct sales; however, on the upside, we found they end up being a key driver in scaling our seasonal business both direct and indirectly.

Large wholesale orders translate to the ability of a small business to order larger quantities from manufacturers, typically resulting in a lower cost per unit overall, helping further increase margins for direct sales. This is a great thing, but even better is the realization that with the deposit from a wholesale order of at least 50 percent of the total cost of the order pre-paid, a direct-sales inventory production run can be funded.

With seasonality and rapid growth combined, and the resulting pressure on cash flow management, we have a renewed interest in select wholesale relationships as the cash that flows from a large wholesale order that's placed during our off-season can actually fund our next season’s inventory for direct sales. Even though the margins and overall net profit are less with wholesale orders, it gives our company more financial stability and a consistent cash flow; the wholesale orders also provide a stepping-stone to scale both in the short and long term.

2. Pay for the bulk of expenses during the time period your company is receiving its largest cash inflow

Let’s face it, cash is king. For seasonal businesses, cash flow management can get very tricky during the off-season when monthly fixed costs are still present, but revenue is very low.

At SeaTurtle Sports we're lucky that our larger operational costs occur in direct relationship to our high revenue periods. If this does not hold true for your seasonal business, you should consider setting up payment in advance for key operational activities to match the times of high cash inflow. Businesses fail when they are reactive to cash flow needs and get behind on accounts payable. This strategy will help mitigate the risks of a seasonal business. It is also very helpful to reduce expenses during those slow revenue months so your business is operating as lean as possible.

3. Monitor cash flow on a week-by-week basis and build up cash reserves

What we mean by this is it is essential to get through each season in a calendar year for your business to stay operational--but you also must be looking a year or two out at all times. Understand what the growing demand for your business might be. Will you need to increase your inventory quantities year over year? How much more? Might there be a chance you get a large purchase order unexpectedly? What would you do to obtain the cash to fulfill a large, unexpected purchase order?

Just like you might keep personal cash reserves for emergency situations, you should do the same in your business. Start putting away as much cash as possible--even in small increments--to use for emergency situations or unexpected opportunities, and be aware of your cash needs both in the short and long term.

4. Open up a line of credit as soon as you can

With a seasonal business, it is never too early to open a secured line of credit with your bank or financial institution. Even if you feel you don’t need a line of credit just yet, taking the steps early to assess what type of additional working capital you have access to is never a bad thing.

You will want to start small and manage the line of credit as a way to weather the lean months and replenish inventory. You will also want to request increases on an annual basis. Even if you don’t get the bump you were hoping for, you are building a track record, and combined with growth, your bank will be more inclined to accelerate the credit line. All of this adds up, and in three or four years, you will be happy to focus on your business versus chasing working capital.

In summary, you may not have a business as seasonal as Christmas trees, fireworks, or Mardi Gras costumes (as we do on the Gulf Coast), but any level of seasonality can add unexpected complexity to managing cash flow for your small business. Proper planning and creative solutions will not only help you get a better night’s sleep during the off-season, but possibly present new working capital opportunities at the same time.