Every business has cash flow cycles. At various times of the year, demand rises, and at other times, it falls. Sometimes those cycles are related to consumer cash flow, other times corporate budgets are more the driver, and in more cases than you might expect, the weather is the primary factor.
Businesses built around a product or service that is more popular during certain times of year are most impacted by seasonality. Country clubs, ski resorts, tax accountants, landscape designers, wedding photographers and college campuses are prime examples. During periods of high demand, revenue rises, often followed at some point by periods when cash is scarce. Even when anticipated, such declines can make cash flow management more difficult. When these businesses don't include seasonal fluctuations in a cash flow in their forecasts, they risk running out of cash during a slack period, just when it's time to ramp up for the next busy season. That's why one of the most critical elements of an accurate cash flow forecast is accounting for seasonality.
Walking down the downtown alley of a small suburban college town can be a completely different experience depending on the time of year. During the spring and fall, shops may be bustling with customers and energy, while people may be hard to find in the summer months. As for coastal vacation cities, customer traffic would be the opposite- packed in the summer and deserted during the winter. Regardless of the type and location, most (if not all) small businesses experience seasonal fluctuations. There is no going around this fact, and business owners must be prudent in their management decisions as they face seasonality.
Indeed, most seasoned small businesses are fully aware of these variations. Yet, too many managers and small business owners make a critical mistake of over-attributing business outcomes with seasonality, which may lead to missed opportunities and losses. For instance, reduced traffic and sales during the summer months for a college town store is, in the owners’ minds, because of seasonality; however, local customers may also be falling away further because the owner simply makes no effort to maintain a high level of service and product quality during these low tides. In fact, this happens quite often. Low traffic and sales during the summer inevitably leads to negative moods for owners and managers, which can spillover to less than optimal service to customers. With reduced and tight cash flow, small businesses are extra reluctant to invest in their business during the summer to ramp up business in the fall.
Taking advantage of seasonality can actually be a huge opportunity for small businesses. Seasonal fluctuations in demand affect a wide range of business functions, from formulating production schedules to purchasing materials, ordering inventory and setting sales quotas. As a result, plans for managing the effects of seasonality can and should include a variety of actions.
Some measures that can be taken to deal with seasonality are to speed up collections when cash flow looks like it's about to slow down and to reduce stock levels to better match sales during a slow period. Businesses can also tighten purchasing policies, seeking better terms on purchases and putting money aside to tide the company over in a lean period.
Another way to prepare for seasonality is to ensure access to adequate capital. Because it can take time to apply, receive approval and activate a line of credit or other funding facility, arrange for credit well before the need arises. What's more, credit applications are all about proving the health of your business, and it's much better to secure a loan or credit line before when your finances are in their best shape possible.
By using the slow times to invest in new décor and equipment or develop new products, small businesses can reach new levels each year. It is therefore extremely important to manage a company’s finances in highly seasonal markets. With the advent of online small business financing companies such as LVRG, small businesses and independent business owners can now efficiently and reliably find optimal rates and terms to fund their strategic decisions to invest during slower times, and harvest the returns in a matter of months. Have questions? We've got answers!