Managing cash flow in a seasonal business

A challenge for businesses in a wide range of sectors

Several factors can create seasonality in a company’s cash flow, these include:

• Seasons and weather patterns

In industries such as agriculture, the seasons directly dictate production cycles: corn only grows in the summer. In others, weather conditions indirectly affect the provision of services, and thus cash inflow. For example, excavation becomes more challenging when temperatures drop below freezing. For this reason, this type of work tends to be done mostly in the summer.

• Regulations

Certain industries are regulated so that businesses can only operate and generate revenue in a given period, explains Mike Ball, Manager, Business Centre, at BDC. “Fish harvesters, for instance, are required by legislation to only catch product in a certain season based on things like migratory patterns and spawning cycles, oftentimes from early spring to mid-fall, depending on the species.”

• Academic schedules and consumer preferences

Tourism is heavily affected by school calendars, as summer breaks and vacations provide families with the time needed to travel. Similarly, tourists may prefer to visit a region when it is warm and sunny, or even snowy, observes Paul Goodwin, Manager, Business Centre, at BDC. “A hotel in Niagara Falls, for example, may be at full occupancy in August, but only 55 % occupancy in February or March. Rates will also be lower, further impacting cash flow.”

Types of businesses that commonly experience cash flow seasonality

Agriculture and fisheries

Agriculture businesses experience strong cash flow seasonality due to the nature of harvest cycles. The fishing industry also faces significant cash flow seasonality, as it is governed by seasonal fishing quotas and regulations.

Tourism and hospitality

Hotels and other businesses that depend on tourists often generate the majority of their income during peak travel seasons. Off-season, these businesses must cover operating costs with far less revenue coming in.

Retail

Many retailers see spikes in revenue during the holiday season, with sales declining in off-peak months.

Construction

Weather conditions can make it challenging or impractical to complete certain tasks. Consequently, construction companies often experience winter slowdowns while fixed equipment and overhead costs stay the same.

Landscaping

Landscaping businesses typically reach peak demand in spring and summer since tasks such as mowing lawns and planting flowers are impossible in the winter. Additionally, customers are more likely to consider enhancing their outdoor spaces during this time.

Outdoor recreation

Ski resorts, summer camps, golf courses or water parks are naturally limited to certain times of the year. The high season provides a short window to generate income that must sustain operations for the rest of the year.

Main cash flow challenges for seasonal businesses

1. Loan payments are too high in the low season

In terms of assets, seasonal businesses are similar to other businesses: They need equipment, facilities and perhaps real estate to operate. However, the cyclical highs and lows in cash flows can pose significant challenges when repaying loans taken out to acquire these assets.

As a result, cash inflow can be robust during peak seasons, allowing businesses to cover operating costs and service their debt comfortably. But once the low period arrives, revenue can plummet, making it difficult to meet  financial obligations. This can lead to financial strain.

Solution

Negotiate repayment terms so they match your revenue cycle

Certain banks may offer flexibility on principal repayment of a loan, explains Mike Ball. “You can speak with your financial institution’s representative to negotiate or renegotiate, whenever possible, payment terms that allow you to pay more of the principal in the high season, and less in the low season.”

In practice, seasonal payments typically require companies to make interest payments consistently throughout the year, while allowing principal repayments to fluctuate based on the revenue cycle of the business.

“In the fisheries, for instance, principal repayment for harvesters would normally take place in the fall, after selling their fishing catch,” says Ball. “It could be done in three or four instalments, for example, to coincide with when the company has its strongest cash balance.”

Of course, these arrangements can only be made if the business has a solid grasp of its cash flow position. And achieving this understanding requires the right tools and knowledge. Filling out a cash flow planner can be a good first step in this process.

2. The company does not understand its cash flow position

According to Mike Ball, entrepreneurs sometimes misjudge the strength of their cash flow by relying too heavily on their bank account balance. Some even decide whether to pursue a business project or investment by looking at their bank statement.

“However, your bank balance is only an indicator of liquidity at a moment in time. It doesn’t tell you anything about your financial obligations, such as taxes due or money owed to suppliers,” he warns. Inversely, your cash balance may be low, but if you have a large amount of receivables ready to be collected, your cash position will likely be strong soon. It is important to view bank balances in context with upcoming cash inflows and outflows.

Ultimately, understanding these nuances is vital for informed decision-making.

Solution

Use the right tools and apps to understand your cash flow position

Having good financial tools will give you the information you need to manage your cash.

An enterprise resource planning (ERP) software, for example, will centralize all your financial and inventory information to give you a better understanding of your cash flow.

It will also help you see ahead. By looking at historical data, it will help you forecast sales and revenue to help make better financial decisions.

The right system can also help compare your current cash position with your position in past years. Imagine, for instance, that you are low on crash. Is this situation unique to this year? What was it like last year? And how are your peers doing? Is this an industry-wide situation? With the right information, you will be better able to understand what is normal for you.

Additionally, technology can help you present your cash flow reality to your bank representative, facilitating negotiations for repayment terms that align with your revenue cycle.

3. Bridging the gap between payables and receivables

Bridging the gap between payables and receivables can be challenging for any company: You need to pay cash right now to employees or to buy raw materials, but the client may only pay a month or two later.

However, this issue is particularly challenging for seasonal businesses. At the start of the season, companies need to pay for payroll, fuel or electricity to operate equipment, and inventory purchases, but they may not have collected any cash for an extended period—maybe months.

During this initial phase, businesses often need to cover substantial expenses while waiting for cash to come in.

Solution A

Get a line of credit

A line of credit can be a valuable tool to help bridge the gap between payables and receivables, especially for younger businesses that have not yet built up a cash buffer for the ramp-up to the high season.

“If you’re a new business and you have little cash on hand, then a line of credit can help you make up the difference in between your payables and receivables,” says Goodwin. “Ideally, if you achieve profitability, you’ll be able to build a cash reserve for future needs.”

While a line of credit is the best form of credit to use to bridge outstanding receivables, a cash flow loan may be a next step solution if the line of credit limit is not sufficient to bridge the gap.

Solution B

Collect your receivables more quickly

Another solution consists in getting your clients to pay faster.

There are many ways to do so, but perhaps the cheapest and easiest is simply to ask, explains Goodwin. “If you give clients 45 days to pay, they may pay in exactly 45 days, only because they can. But if you ask, they might be just as happy to pay in 30 days.”

If some convincing is necessary, you can offer a small discount—say 1%—to clients who pay within a shorter period.

Conversely, try to negotiate longer payment terms with your suppliers. It will give you more room to maneuver while waiting for your receivables to come in.

4. Prepaying your mortgage at the right time

Seasonal businesses experience a much stronger cash flow position during peak seasons compared to low seasons. As a result, many seasonal business owners seek to prepay their mortgages at the end of the season, when they have saved some cash. However, Paul Goodwin cautions that this may not always be the best decision despite appearing strategic at first glance.

“We see this often with golf courses, for instance,” he says. “They make most of their money in July and August, so they will want to prepay their mortgage in the fall. But if they do, they might not have enough money to get them through the lean winter period.”

Solution

Prepay your mortgage before the peak season

The best strategy for prepaying a mortgage is to do it in the months preceding your peak period, advises Goodwin. That way, you can use your strong cash position to get your business through the low season and use the remaining liquidities to prepay your mortgage.

“Remember, cash is king,” says Goodwin. “You want to hang on to it for as long as possible, just in case.”

5. Too much inventory during low season

Managing inventory can be a significant challenge for seasonal businesses, particularly during the low season. Excess inventory can lead to several problems, the main ones being:

• Increased costs

Storing surplus inventory implies higher storage expenses, including rent, utilities, maintenance and insurance coverage.

• Tied-up capital

Excess inventory ties up cash that could be used for other operational needs or investment opportunities.

• Obsolescence risk

Products sitting in inventory for too long may become outdated or obsolete. This may lead to markdowns or sales promotions to clear stock, reducing profit margins.

• Spoilage

Perishable goods may spoil, a significant risk in the restaurant business, for instance.

Solution

Adjust inventory levels

Optimize inventory levels to meet your demand cycle. 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 account of these cycles in both demand and volatility. For example, you may want to increase buffer stock when volatility is higher.

A good ERP will help you forecast demand and understand your company’s typical demand cycle according to historical data.

Next step

Download our free cash flow planner to track your company’s cash inflows and outflows and manage your cash.