2015-06-10 00:00:00Cash FlowEnglishMore often than not, cash flow is difficult to manage in seasonal business. Luckily there are steps to ease the cash crunch during the down...https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2015/06/Seasonal-Inventory-Business.jpghttps://quickbooks.intuit.com/ca/resources/cash-flow/5-tips-on-managing-cash-flow-for-a-seasonal-business/5 Tips on Managing Cash Flow for a Seasonal Business

5 Tips on Managing Cash Flow for a Seasonal Business

5 min read

More often than not, cash flow is difficult to manage in seasonal businesses. Sure, if you had a runaway success on your hands, you could focus your attention elsewhere. But if your business is in the majority, you’re bound to encounter some challenges along the way. Luckily there are some straightforward steps you can take to ease the cash crunch during the down season.

Contract Employees

Contract employees are a great way increase your financial flexibility. For the seasonal business, it is important to ensure the right resources are available when – and only when – you need them. Inking your workforce to defined stints that parallel your busiest periods can accomplish just that. Given the significance of payroll costs for most businesses, minimizing wage donations for idle time is a logical move. However, it is not without its risks. For a more complete discussion on the topic of contract employees, refer to my post on Taking Control of Your Business’ Profitability.

Lease Equipment

The concepts of contracting employees and leasing equipment are similar; both are intended to retain resources for definite terms. While it may seem foreign to lease office and computer equipment, you might be surprised by the options. Even specialized equipment can be leased. If golf courses and tanning salons can lease equipment, then your business most likely can too – and without the traditional upfront cash outlay.

There are two strategies available: renting for the period required or leasing with flexible lease terms. The former is self-explanatory as it literally refers to renting equipment for the desired duration. The latter, however, breaks down into subcategories, two of which are referred to as skip payment and step payment leases.

Skip payment leases are designed for seasonal businesses and allow businesses to make payments throughout high season and stop making payments during periods of inactivity. Step payment leases are similar, but with one key difference. Where skip payment leases facilitate payment stoppage altogether, step payments are required throughout the year but flex with your business’ cash flow.  The optimal leasing type depends on the extent of cash flow cyclicality. Easylease and Equilease are two leasing companies that provide a plethora of choices to meet your unique demands.

Flexible Location

If your employees and equipment are fixed-term, shouldn’t your facility be, too? Temporary space can be hard to come by if your business is heavily reliant on location, and it needs to be consistent each busy season. But if all you need is office space then you are in luck!

All of Canada’s major markets have shared office and co-working facilities, and usually in accessible locations. This type of accommodation is particularly ideal for businesses whose space requirements are expected to grow in parallel with revenues because you only pay for the space you use.

However, if your business does happen to be location-reliant, you might want to consider subletting all or part of your facility for the time frame it’s not in use. Just as your space requirements are unique to the time of year, there are likely to be counterparts to your business model that require operating space when you do not. Capitalizing on this model is a great way to maintain a semblance of stability despite intermittent cash flows.

Take Advantage of Low Interest Rates

Interest rates remain suppressed in the wake of the 2008 financial crisis. Although the events of that year may seem like a distant memory to some, the Bank of Canada prime business rate has not yet recovered to pre-crisis levels, and is currently pegged at 2.85%. While this may not be a promising sign for the economy as a whole, it does provide an opportunity for your business to stabilize its cash flow.

Even if the majority of your costs fluctuate with the peaks and valleys of revenue, some off-season expenses may be unavoidable, especially if unexpected. While you will still need to make minimum payments, borrowing cheap money to pay your bills during down times is a great way to shift the burden of expenditures into periods of higher activity. As long as you can comfortably repay the loan when revenue apexes, low-interest borrowing may just be your business’ golden ticket.

Minimize working capital

Working capital is composed of the short-term assets and liabilities on your balance sheet. Simply put, working capital typically includes cash (and liquid investments), customer receivables, inventory and prepaid bills, offset by amounts currently owing to vendors, lenders and employees, that will be paid within one year. Minimizing the working capital required to operate is ideal in all businesses because it limits the amount of cash tied up at any given time. However, minimizing working capital requirements of a seasonal business is vital.

One way to increase the amount of cash available is to shorten payment terms when billing vendors. The length of time granted to businesses to pay an invoice varies by industry. Generally payment terms are not less than 30 days and not more than 90 days. Therefore, requesting payment in 30 days is a good place to start because it means you should get your money sooner. If the receivable is not collected within the 30 day window, you could begin to apply a reasonable interest rate to the balance. However, a word of caution; do not offer discounts for early payment.

Businesses sometimes offer payment terms such as “2/10 net 30”, meaning a 2% discount is provided for paying 20 days early. Generally interest rates are communicated based on their annual cost. If you do the math on this 2% discount, it works out to a 36.5% discount on an annualized basis. When comparing apples to apples it is clear to see why offering such terms is ill-advised.

Accordingly, you may have the opportunity to negotiate longer payment terms and early payment discounts with the vendors you purchase products and services from. Larger businesses are less likely to entertain the idea, but small vendors are more likely to accommodate your request to maintain your business relationship. Even if you’re able to delay invoice payment deadlines by 15 days that is valuable time in which you are able to utilize that cash in your business. And if you are able to negotiate an early payment discount, it probably goes without saying that you should take advantage of it.

Another method of minimizing working capital is through stocking as little inventory as necessary to meet customer demand. In order to accomplish this, an analysis of past sales and the creation of a forecast can be helpful. (A good bookkeeping software can help with that process.) Stock-outs are usually not a positive for small businesses as customers are likely to balk and head elsewhere for a competing product. But if managed correctly, only a small safety stock is necessary so that in the event that demand exceeds expectations, you are still able to sell to your customers. Of course, this strategy is only effective at maximizing cash flow if reduced order quantities don’t significantly impact the unit price of the goods, but analyzing that impact is worth it nonetheless.

Don’t be a victim of seasonality. Take control of your cash flow and rest easy in the off-season.

Photo: freeimages.com

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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