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The ups and downs of running a small business are exciting and sometimes worrisome, but when that small business is a seasonal business, cash flow issues can make the roller coaster ride frightening - or even deadly.
The problem - business and income bottoming out in the off-season- isn't easy to fix. But there are ways to mitigate the effects. Here's how to do it.
Fix This Mistake If You're Making It
According to Calvin Harris Jr., CPA, President of Change Management at Harvin Consulting, a boutique consulting firm that provides "On Call" CFO and Project Management services, “The biggest mistake business owners make when it comes to cash flow really is very simple...they don't manage it. They don't predict out into the future. Organizations—no matter if they're very large or very small—the ones that have the best control over their cash are the ones that are able to succeed.”
The reasons small businesses don't manage their cash flow vary. Some, simply don't understand cash flow. It’s not unusual for business owners to think if they’re making a lot of sales they must have positive cash flow. Profits and cash flow are not the same thing. You can have a profitable business on paper and not have a dollar in the bank.
Some business owners claim they don't have the time to manage cash flow and others are scared of what they may find.
Compounding the problem, many small business owners lack a general understanding of accounting principles. That makes it tough to get a handle on your company's financial health in some cases.
The good news? You can conquer your cash flow issues.
How to Take Charge of Your Cash Flow Problem
Here are 21 things you can do that will help you deal with the ups and downs of a seasonal business:
- Save for a rainy day. Jim Salmon, VP of Business Services at Navy Federal Credit Union, the world’s largest credit union said, “It’s a sign of strength and maturity for a small business to have a cash reserve. It's the smart thing to do."
- Work with your lender to set up a line of credit. This can help you through the slow periods.
- Take advantage of other tools and resources your bank or credit union has available to help you manage your cash. These include overdraft, mobile deposits, and solutions for automating your invoicing and bill payments online.
- Offer your customers multiple payment options. Make it easy for people to pay you. You can use services like Square and PayPal to accept credit cards. You can even have your customer deposit your payment directly in your bank account.
- Diversify your product or service offering to help offset the effects of seasonality. A wedding planner might plan company holiday parties during the slower winter months. How can you add to your primary streams of revenue during your off-season?
- Consider alternative funding methods. There are options besides traditional lending institutions like temporary cash flow loans from online lenders, factoring, peer-to-peer lending networks, equity financing, and loans from friends and family.
- Match your assets and liabilities. Robyn Barrett, Founder and Managing Member of FSW Funding, an independently owned and operated factoring firm, said “The biggest mistake I see is that businesses are very short-sighted when they are making a loan decision and they will usually jump at the first opportunity to get a loan without thinking about how those loan proceeds should be used. Any business should be linking their long-term liabilities with their long-term assets and short-term liabilities with short-term assets.”
- Get a handle on your fixed and variable costs. Knowing your fixed costs helps with forecasting. When cash is tight, look to cut back on your variable costs. Better still, try to link variable expenses to revenue.
- Reduce the time it takes to get paid. The best way to do this is with better invoicing. You need a process-driven way of collecting your cash and a systematic follow-up system.
Related: Getting Paid Faster
- Negotiate with vendors. Ask your vendors and suppliers for a discount or extended payment terms that better suit your business needs.
- Design a budget that reflects your business's seasonality. This will help you save during peak income periods and meet expenses during the slow season.
- Engage in cash planning. Forecasting and budgeting will help you see the “big picture” and prepare for the ups and downs of a seasonal business. Projecting your income and expenses and keeping a close eye on inflows and outflows is vital.
- Analyze your situation regularly. Cash flow analysis lets you track the flow of funds in and out of your business. Make a habit of examining your finances either monthly or quarterly.
- Use all the resources that are at your disposal. Take a look at the Small Business Administration’s (SBA) CAPLine Loans umbrella program. Use this free cash flow worksheet from SCORE. Use QuickBooks or other accounting software to make a cash flow statement.
- Use customer deposits to help with slow periods. A deposit can offset your up-front costs or help you purchase inventory.
- If you can’t or won’t manage your cash flow, hire someone. If you don’t have an accountant or financial analyst in-house, you can hire an expert to handle this part of your business.
- Lease instead of purchase. Although you’ll pay more in the end, leasing can free up additional cash to run your business.
Related: Should You Purchase or Lease Business Equipment?
- Slow down payments. You don’t want to annoy your creditors and suppliers but delaying payment keeps the money in your business longer. If this isn’t an option consider paying with a credit card, but do so very cautiously. If you can't pay off the balance at the end of the month the high credit card interest charges will lower profits and add significantly to your cost of business.
- Use your downtime for strategic planning. In the off season create budgets that reflect seasonality. Market your business aggressively and look for additional opportunities to generate revenue.
- Consider closing down completely for part of the year or drastically scaling back during your off-season. This can lower your variable costs and operating expenses.
- Get educated and financially literate. You should be able to understand your balance sheet and do simple cash flow analysis. If you don’t know enough to do financial analysis, you owe it to yourself to improve your financial IQ.
Lack of cash can kill your business. But with a little work, you can take control of your business’ finances. Don’t procrastinate; do it today.
© 2015 Attard Communications, Inc. All Rights Reserved. May not be reproduced, reprinted or redistributed without written permission from Attard Communications, Inc.
Anthony Sills is a direct-response copywriter and content strategist on a mission to eliminate boring marketing. He's written copy for eBay, SEMrush, IBM, American Express, InfusionSoft and many exciting startups. You can always reach Anthony via social media or email.