Seasonal Cash Flow Issues

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Seasonal Cash Issues in Small Business

The majority of small businesses have some measure of seasonality. When it comes to weathering the ups and downs of the seasons, adequate cash flow is imperative. Thorough planning, forecasting, and consistent review of financial reports can help managers mitigate the effects of seasonal sales and better prepare the business for future growth in lean times.

Seasonality in small business has two sides. There are issues with a seasonal increase in sales, such as how to manage a large inflow of cash, or how to fund the creation of goods and services before a busy season. On the flip side, there are issues with a seasonal decrease in sales, such as how to make payroll or sustain the business while sales are slow. In areas where travel and tourism make up a large part of the local economy, many small businesses will have an influx of cash during the peak season, and then sales will fall off as the tourist season wanes. The weather also has a strong impact on sales, especially in businesses that rely on a particular kind of weather for robust sales. The increase in demand for goods and services around the holidays can also pose challenges in labor and production.

Small businesses, especially new start ups, may have considerable challenges in managing cash flow. Cash flow refers to the company’s inflow and outflow of cash, and whether or not the company is seeing a profit from its activities. Ray Thompson’s article Understanding Cash Flow: A System Dynamics Analysis (1986), states that the “ ‘rules of the game’ are distinctly different for the small business.” Being under capitalized, “they depend on various sorts of short-term financing such as accounts payable, accruals, and lines of credit (Thompson, 1986).” Established, large corporations, while not immune to cash flow issues, tend to have adequate internal capabilities to manage cash flow during lean times.

The bottom line for any kind of business that experiences inconsistent sales is that cash flow management is imperative to the success of the company.

Planning for a slow season can be easier said than done, but there are a variety of financial statements a business creates that can help managers forecast cash flow issues. Forecasting helps a business decide what options are available to the company to remedy cash flow issues due to seasonality. One of the best things a manager can do is develop monthly sales, spending, and cash flow forecasts. Monthly reviews of these reports can help the manager understand the seasonal peaks and valleys, consider borrowing options, and help forecast and plan future profits.

So where does a small business look for cash flow in lean times or as a busy season approaches? There are a number of tried and true techniques for accessing cash.

  1. Internal Accounts
  2. Savings and Investments
  3. Lines of Credit/ Borrowing
  4. Alternative Revenue
  5. Lay off and Close

The first and easiest place to look is in accounts payable and receivable. Most businesses operate by hoping their clients will pay as soon as possible, while simultaneously trying to pay their own bills as late as possible without incurring overdue costs. If the business demands payment from accounts receivable, they can quickly increase cash flow just by calling in profits that have already been made. A business manager can also develop vendor relationships with flexibility to pay later, allowing the business to keep cash on hand a little longer. The second place to look for increasing cash flow is the business’s savings and investments. A manager who understands the peaks and valleys of the business can make an effort to save for seasonal cash needs, and liquidation of investments can often free up cash, although there may be penalties involved with this solution. A third option is to borrow money. A business may already have lines of credit available. If not, developing strong relationships with banks and other lenders throughout the year can help ensure cash when needed. A fourth option is to look for alternative operations/products for the slower seasons, creating an offseason demand that brings in a new source of revenue. And finally, a seasonal business may simply decide to hire during their busy season, then lay off employees as the season ends, perhaps even closing the business until the next busy season.

All of these options require knowledge and understanding of the business’s cash flow needs. Through monthly review of cash flow statements, managers can plan and prepare for the cash needs from season to season.

It is important to understand that these kinds of reports are living documents. A cash flow statement is simply a snapshot of the company’s cash at a given point in time. However, with multiple years of statements showing the inflow and outflow of cash, a manager can begin to forecast the lean and fat times of the business.

Reviewing the reports on a monthly basis can help a manager foresee a cash flow issue and address it before it becomes a problem. In essence, keeping an eye on financial reports allows managers to plan, forecast, review, and adjust for cash flow throughout the year. The point is to keep a positive cash flow in the slow season and not mismanage cash during times of increased profit.

References

Soto, A. (2017, March). How to Balance Cash Flow in a Seasonal Business. [Blog Post]. Retrieved from https://articles.bplans.com/how-to-balance-cash-flow-in-a-seasonal-business/

Thompson, R. (April 1986). Understanding Cash Flow: A System Dynamic Analysis. Journal of Small Business Management. (Vo. 24, Issue 2), pp. 23-30.

One thought on “Seasonal Cash Flow Issues

  1. I know you are familiar with this topic, all too well, living and working in Brevard. It’s not just tourism, it’s halftime or quarter time residents who also impact businesses. Thanks for exploring so many options for dealing with seasonality. While it’s not the case anymore when I was in college, I worked at Biltmore Estate and they had huge issues with seasonality. I used to ask to be cross-trained in as many roles as they would let me learn so I didn’t get laid off from January to March. I never did get laid off and I knew how to do just about every job in the Winery except for making the wine. Biltmore has done a tremendous job in the past 10 years minimizing their seasonality by having pass-holder appreciation months, traveling exhibits, and hosting groups during offseason. I suppose it’s hard for a whole town to do this sort of thing, but creative entrepreneurs always surprise me within some of the things they come up with for locals during the offseason.

    Like

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