If you operate a seasonal business, chances are you might have difficulty meeting financial obligations during slow periods. Even though your revenues may be decreasing, you still have to pay your fixed costs.
When it comes to managing the finances of a seasonal business, 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.
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.
Questions to consider
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?
Optimize your inventory
If your company has seasonal highs and lows in demand, you should 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 $200,000 to $400,000 in monthly sales during its summer high season, but a much smaller variation of $70,000 to $80,000 in the slow season.
Inventory levels should take into account cycles in both demand and volatility. You may want to increase buffer stock when volatility is higher.
Flexible 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.
Reduce high cost debt
If you can’t change your sales cycle, you could consider reducing or even eliminating high cost debt. Using high cost debt 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.
Managing the finances of a seasonal business can be difficult. But with the proper data, knowledge, and the right tools in place, you will find yourself prepared for the low season.