Many businesses experience seasonal peaks and valleys of revenue. Retailers, distributors, and manufacturers of goods for the December holiday season are good examples, as are construction businesses in some parts of the country and companies that provide lawn and garden products. Managing company finances to help you stay afloat during slow times and grow profitably overall is challenging for seasonal businesses and requires a keen understanding of several best practices.
Cash Flow Management
This is the most critical financial skill business owners with seasonal companies must master. Two parts of the seasonal cycle affect cash flow most: going into the peak season, and coming out of the peak season. Going into the peak season, a business must have adequate cash to purchase inventory and hire seasonal personnel. Exiting the peak season, the owner must pay vendors at a time when income is dropping off. Using a 13-week cash flow forecast is the best way to manage cash flow during periods of very strong and very weak sales. Many companies that begin using short-term cash flow forecasts use them all year, not just when tight cash flow warrants.
This is particularly important for seasonal businesses. This is the amount of funds you need in your company bank account to sustain your business for a certain number of weeks. No perfect formula exists for estimating how much safety cash a company should maintain. Seasonal businesses typically need to dip into their safety cash more than other businesses, so determining how much cash you’ll need on hand during slow months is critical. Take into account all your regular monthly expenses as well as payments to vendors once the peak season is over.
Inventory fluctuates in seasonal businesses. For many companies, inventory control is as much art as it is science. You’ll reap no benefit carrying excess inventory during low sales periods; yet you must maintain adequate inventory during peak periods so you don’t lose sales. Because inventory is converted to accounts receivable and then to cash, finishing a season with the most cash and the least amount of inventory is optimal. Part of the strategy for seasonal businesses should be using vendor trade credit for financing some or all inventory costs. Often, dating terms can be obtained from a trade vendor at the beginning of a sales season to help build inventory. Once the season is over, make sure to pay your trade vendors according to the agreed upon terms so you maintain goodwill for the next upward cycle.
Bank credit lines are usually the least expensive forms of working capital; however, it can be difficult to obtain as much credit as your business needs for the peak season. Accounts receivable financing, or factoring, is a good alternative for seasonal businesses that need more cash than their bank is comfortable providing. Companies selling to another company or governmental agency can sell their accounts receivable to a factoring company and receive most of their money within a day or two of invoicing. The factoring company charges you a discount fee for advancing cash against your invoices.
Factoring lines of credit are self-liquidating, which means the loan balance is reduced when your customer pays the factoring company directly. This feature allows your company to keep its factoring loan balance at the lowest possible level.
Understanding and implementing these financial practices will not only help you weather the seasonality of your business but also allow you to grow profitably from season to season.
Sam Thacker is a partner in Austin, Texasbased Business Finance Solutions.