Seasonal small businesses: Plan for the mismatch in cash outflows and inflows

My small financial services business is not a traditional seasonal business with sales peaks during a particular time of year, but demand does track the peaks and valleys of company financial reporting periods. As a result, rather than having one season followed by a lull, my business has four highs followed by four extended lows.

Nevertheless, this peak and valley pattern results in the need to plan as any seasonal business would. Based on my experience, the mismatch between when a seasonal business must invest cash flow and when cash flow comes in can be one of its greatest challenges. And one of the greatest frustrations a seasonal business owner can face is not having the cash available to take full advantage of demand during the peak of the season.

Therefore, my number one piece of financial advice for seasonal small businesses is to anticipate and plan for the mismatch in cash outflows and inflows of a seasonal business.

How you manage your seasonal business's cash flow will depend on a variety of factors, including how dramatic its seasonality is and its sources of cash. In any case, there are four steps you can take to be sure that your business has the cash it needs to maximize its seasonal revenue.

1. Schedule payment plans around cash inflows. If your business must invest heavily in inventory, equipment, or supplies before the season, try to arrange payment terms with vendors that are aligned with cash flow. If possible, delay payments until seasonal cash begins to flow into your business.

2. Arrange for sources of cash well ahead of the start of the season. Talk to your banker about a line of credit or, if a bank loan is out of the question, perhaps you can arrange a private, short-term loan from your non-bank financial backers. Using credit cards is not ideal, but it also can be a stop gap solution to a cash crunch, especially if you can repay the charges in full at the end of the season.

3. Stock your reserves whenever you have an opportunity to do so. Try to line up more cash than you expect to need so that a cash shortage doesn't limit your ability to respond to demand if it exceeds your expectations. For example, if your bank will extend a line of credit, consider asking for a larger line than you anticipate using so that you don't have to scramble to find more capital in the midst of a seasonal surge when your time would be better spent serving customers.

4. During the off season, hold onto some cash for the next season. If you can carry over a cash balance you will be far better positioned for your next seasonal surge. Also, having some money in the bank may actually make it a bit easier to access additional capital, since lenders or investors are more likely to fund a small business they view as financially prudent.

Read more by S. H. Wallick.

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