Managing cash flow in a seasonal business
If you have a seasonal business, such as in tourism or farming, you may have difficulty meeting financial obligations during slow periods. Even though your revenues may be decreasing, you still have to pay your fixed costs.
Refinancing a business loan for variable monthly payments can help you better manage your cash flow.
You should first evaluate whether or not you can build more business during your low season. For example, you might be able to expand product choice, add more services that extend into busier seasons, or find another source of revenue.
Understand your sales cycle
But if that's not possible, be sure that you clearly understand your sales cycle and what impact it has on your operations and cash flow.
Low-revenue periods are particularly difficult, since cash outflow can be much greater than inflow. You need to carefully monitor and forecast to avoid finding yourself temporarily in the red.
Ask yourself the following questions:
- Is your sales cycle similar from year to year?
- Can you identify the highs and lows of the cycle?
- At which points in the sales cycle have you experienced financial difficulties?
- Have you always been able to meet your financial commitments?
- What are the main payments you need to make during the low season?
Adjust inventory levels
If your company has seasonal highs and lows in demand, you probably try to optimize inventory levels to meet your demand cycle.
However, don’t forget that the demand cycle can affect not only the volume of orders but also their volatility.
For example, a restaurant may have a huge range of $100,000 to $300,000 in monthly sales during its summer high season, but a much smaller variation of $50,000 to $60,000 in the slow season.
Inventory levels should take into account cycles in both demand and volatility. For example, you may want to increase buffer stock when volatility is higher.
Negotiate better payment terms
Making variable rather than fixed monthly payments can be advantageous for some small businesses.
Modifying your payments according to your particular revenue cycle enables you to better manage your company's working capital by paying less when seasonal demand drops off.
If you can't change your sales cycle, you could consider refinancing one or all of your debts.
Eliminate costly credit
Using high-cost credit such as credit cards and bank overdrafts can significantly affect working capital, especially in a seasonal business.
It’s a good idea to lower your credit costs. One way to do this is by consolidating your debts so as to both reduce the interest you’re paying and negotiate a more flexible repayment schedule.