Five Tips to Deal with Seasonal Cash Flow Issues

Maintaining a consistent cash flow can be a struggle for some small business owners, especially if their business is seasonal in nature and experiences some months that are busier than others. When large swings in revenue like this occur, it can be easy to grow into a cash crunch or even worse, spend freely when things slow down again and the surplus hits.

To help business owners better navigate these downturns, Lucrum Consulting has compiled the following tips for all entrepreneurs to reference when faced with seasonal cash flow challenges.

Develop a cash flow forecast

Developing a cash flow forecast is the Number One way business owners can anticipate any expected (and sometimes unexpected!) cash flow shortfalls. A good cash flow forecast works by tracking the results of all inflows and outflows from all areas of the business so the owner or management can successfully manage their business’s slower months with ease.

To get started, most business owners create a profit & loss budget and then adjust for items that affect cash flow only such as debt principal payments, equity distributions or depreciation. These documents are most commonly done monthly although more or less frequently may be warranted given a variety of factors.

Taking this simple step will help create an accurate cash flow forecast for the organization, clarifying its busy and slow seasons. Knowing and understanding these periods of time can help business owners to not only anticipate problems well in advance, but also create a reserve of cash that may be needed in the future.

Establish a business line of credit

When creating a cash flow forecast it’s important to understand that the numbers aren’t set in stone. There may be months where the organization incurs a huge business expense or the company doesn’t perform as strongly as it did during the same quarter last year. That’s okay.

To help shoulder these unexpected expenses during a slow season, consider setting up a business line of credit. A business line of credit can not only provide the business with the capital needed to weather the storm, but also boasts a lower interest rate than a regular credit card, giving business owners a boost during an otherwise difficult time.

A common question is “how high should my LOC credit be?” There is no set answer here, although one common answer is “how much will the bank give you?” Joking aside, the best way to determine a good range is to calculate the company’s cash conversion cycle. Without getting too complex, take your total estimated annual gross revenue (sales) and divide by 365. That gives you your daily cash need. Next, determine your total number of accounts receivable, plus inventory days on hand (Use of Funds) and subtract your accounts payable days on hand (Source of Funds), and this is your usage. Multiply your daily cash need times the usage (accounts receivable days less accounts payable days) and you will get the estimated line of credit needed for your business.

Contact us if you need help doing the actual calculation, or you are getting wildly different results between the bank offer and the formula.

Get creative with sources of revenue

Continuing to move forward when business is stagnant is never an easy task. The trick is to keep innovating and thinking outside the box.

Is cash flow currently at a minimum? Consider hosting a seasonal sale to increase foot traffic. Are the business’s vendor contracts negotiable? Think about changing their payment due dates. Basically, take any measure necessary to ensure the business is covered at all times.

Another option is to offer variable pricing based on demand. Not all industries allow for this but if yours is one where prices are flexible it may be good to increase prices when demand is high and cash flow is strong (think beach rentals in the Summer). Then when things slow down a decrease in price may help preserve demand (and revenue) that may otherwise be lost.

Cut the fat

When business is booming, it’s common to invest in nonessential items that aren’t vital to the organization’s health. So when the going gets tough, these purchases should be the first things to go.

Desperate times, call for desperate measures. Therefore, when the cash flow forecast predicts a shortfall coming in a couple months, look for ways to scale back. For example, maybe there’s an industry subscription or service that can be placed on hold until there’s an uptick. In short, minimize impact before permanent damage is done. Or better yet, don’t load up on frivolous expenses in the first place. The country club membership is not an essential business expense.

Invest in freelancers and contractors
When the money just isn’t coming in during a slower month, meeting payroll can be the hardest obstacle to hurdle. When this happens, consider hiring a contractor or freelancer in lieu of a full-time employee until things pick back up.

While freelancers typically bill at a higher hourly rate, business owners can save upwards of almost 30 percent annually. That’s because they don’t have to pay for the individual’s benefits package, such as their health insurance, dental, retirement, etc. Plus, freelancers/contractors usually work remotely, so business owners can save on office space and supply costs, which are always nice perks.

If your business is seasonal and needs help forecasting its cash flow trends, contact Lucrum Consulting for assistance at 704.927.0462. The team is prepared to help you think ahead, anticipate problems and develop solutions to ensure your company experiences a positive cash flow year round.