Seasonal fluctuations in cash flow are a normal part of business, caused by variations in demand, increased expenses during certain times of the year and other factors.
However, for a business to remain healthy and profitable, it is essential to know how to predict these fluctuations and develop an adequate cash flow management strategy.
Having a plan in place to manage them can help ensure your company has enough funds for day-to-day operations and to capitalise on opportunities that may arise.
In this article, we'll explore some of the best practices for managing your cash flow during seasonal periods, providing:
- Tips on how to forecast and plan ahead for seasonal changes.
- Strategies to maximise your working capital when cash flow is tight.
- Ideas on how to acquire additional funds if needed.
By understanding the basics of managing your cash flow during these times, you can ensure the long-term success and sustainability of your business.
Why seasonal cash flow matters
Before we get into some of the strategies you can use to manage your cash flow during seasonal periods, it's essential to understand why these fluctuations in income and expenses occur.
The most common cause of seasonality is changes in demand, which can be seen when sales for a particular product or service increase significantly throughout a specific period.
For example, retail stores often experience significant increases in sales during the holiday season, while theme parks tend to have higher revenues in the summer months.
In addition, there are other factors that can cause seasonal shifts in cash flow, such as increased expenses related to production or changes in taxation regulations.
Understanding what causes these fluctuations is key to successfully managing them.
The importance of seasonal cash flow management
If managed properly, seasonable differences in cash flow shouldn't present a significant problem for your business.
When left unmanaged, however, it can lead to cash flow shortages, forcing you to make difficult financial decisions.
For example, if expenses increase during a particular season and revenue fails to keep up with that pace, you may need to borrow money or delay payments on existing debt.
In extreme cases, when coupled with other financial difficulties, it can even lead to bankruptcy.
Therefore, understanding the dynamics of seasonal cash flow is essential for businesses in any industry.
As a thought leader in cash flow strategy and has helped thousands of businesses of all sizes and industries, Chaser has distilled this experience into a simple framework and easy-to-implement strategy to help you manage your cash flow during seasonal periods.
Identifying Your Seasonal Patterns
The first step in managing your cash flow during seasonal periods is to identify your patterns.
Analysis of past financial data can provide critical insight into what times of the year are likely to see increases or decreases in revenue and expenses.
For instance, if you own a restaurant, you may find that revenues tend to increase during the summer months when tourists flock to the area.
By identifying these patterns, you can plan ahead for the cash flow impact of seasonal changes.
If your business hasn't been open long enough to identify patterns, you can look for industry-wide trends to help guide your decisions.
For example, if you own a retail store, you can look at sales trends for similar stores in the area to get an idea of what changes to expect during certain times of the year.
Customer surveys are also a great way to get a better understanding of customer buying patterns during different seasons.
By getting feedback from your customers, you can more accurately predict what demand will be like for certain products and services during seasonal periods.
Data is a hugely valuable resource in predicting seasonal fluctuations.
By looking at past financial data and customer trends, you can gain a better understanding of what to expect during different times of the year and make better decisions about how to manage your cash flow during these periods.
Impact on business
Once you understand how seasonality impacts your business, it’s essential to consider what effect these shifts in cash flow have on your business operations.
Below are some of the more common side effects of seasonality on businesses and strategies you can employ to overcome the difficulties they can impose on your business:
Inventory management
As demand increases during seasonal periods, businesses may need to purchase more inventory in order to meet the increased demand.
This can lead to cash flow shortages as the company has to pay for the inventory upfront and won’t receive full payment until after it is sold.
To avoid this, companies should plan ahead by forecasting their expected sales volume during peak seasons and purchasing enough inventory to meet that demand.
On the flip side, businesses may find themselves with an excess of inventory during other times of the year. Storage and spoilage costs can add up quickly if businesses don’t have an effective inventory management system in place.
To minimise these costs, businesses should look into ways to reduce their excess inventory, such as running promotional campaigns or selling off the extra stock.
Staffing
During seasonal periods, businesses may have to adjust staff levels to match changing customer demand. Peak and off-peak periods may require more or fewer staff than usual, so it’s essential to plan ahead and be prepared for any adjustments that will need to be made.
Businesses should consider the cost implications of hiring additional staff during peak seasons and look into alternatives such as outsourcing or temporary staffing solutions.
At the same time, using seasonal positions can also be a great way to recruit talent during peak periods.
Operational expenses
Depending on the type of business you have, operational costs may also be subject to seasonal fluctuations.
For example, businesses providing entertainment tied to the weather, such as amusement parks or outdoor events, may have higher operational costs during peak periods due to increased maintenance costs and the need for additional staff.
Alternatively, during off-peak periods businesses may find their operational costs decreasing due to lower demand, only to be replaced with costs associated with increased maintenance and storage of equipment or materials.
Using the same example of the amusement park, even during the winter months, the park may need to be staffed and maintained in order for the site to remain secure and the equipment not to become damaged or stolen.
Just because there are no visitors doesn’t mean that costs don’t still need to be managed.
Businesses also need to be aware of the impact that seasonal changes can have on their utility costs.
For example, if your business is located in a colder climate, you may experience an increase in energy costs during winter months as heating systems are used more frequently.
Likewise, businesses operating out of buildings with air conditioning will likely see an increase in electricity use during hot months.
Examining past utility bills and making changes, such as installing more energy-efficient systems, are effective ways to reduce costs and manage cash flow during seasonal periods.
By taking the time to properly understand and plan for seasonal changes in cash flow, businesses can ensure that they remain financially secure during both peak and off-peak periods.
Proactive planning
Taking a proactive approach to cash flow management is critical to long-term success.
It’s essential to create a plan that anticipates the financial impacts of seasonal fluctuation and puts strategies in place to ensure your business can survive these periods.
While each plan will be specific to your business, some of the most effective strategies to consider include:
Developing a budget that anticipates seasonal changes
Budgeting is critical to understanding and preparing for the financial impact of seasonal changes.
By forecasting sales, expenses and cash flow during peak and off-peak periods, you can plan ahead to ensure your business has enough funds to cover all necessary costs during these times.
Monitor cash flow and ensure you have enough financial reserves
Taking a holistic view of your cash flow is essential to ensuring that you have enough funds in reserve to cover both anticipated and unexpected expenses during peak and off-peak periods.
Monitoring cash flow daily and having a clear understanding of where the money is going can help identify any potential problems before they arise.
Having emergency funds set aside is also an integral part of maintaining a healthy cash flow.
When seasonal changes occur, having funds in reserve can help ensure that your business has enough to cover any unexpected costs or fluctuations in demand during peak and off-peak periods.
Diversify revenue streams
If you find your business suffers from cash flow shortages during seasonal periods, it’s essential to explore all possible options to generate additional revenue.
For example, some businesses may be able to diversify by offering additional products or services during peak periods, while others might look into expanding their customer base or exploring new markets.
Alternatively, businesses may consider selling unused inventory and taking advantage of promotional campaigns such as discounts and coupons to drive more sales during seasonal periods.
As mentioned, being proactive is the key to managing cash flow during seasonal periods.
By anticipating and planning for potential changes in demand, businesses can ensure that they are able to handle any unexpected financial pressures seasonality may bring.
Have an optimised credit control process
Having an effective and optimised credit control process can help to improve cash flow.
This includes setting up standard payment terms, having automated customer chasing systems in place, and using third-party debt collection services if necessary.
By putting the right processes in place, businesses are better able to ensure that they receive payments on time and have enough funds to cover the costs associated with seasonal changes.
Financial tools to consider
In addition to the methods mentioned above, businesses can also take advantage of various financial tools and services to manage their cash flow during seasonal periods, including:
Emergency funds
An emergency fund is a pool of money set aside for unexpected costs or expenses. Having an emergency fund in place can help ensure that your business is able to cover any unexpected cash flow shortages during peak and off-peak periods.
Some steps you can take to set up an emergency fund include:
- Using financial data to estimate the amount of money you may need in order to cover any unexpected costs
- Setting up a separate savings account for the emergency fund
- Making regular contributions from your main business account to the emergency fund
- Automating payments when possible
Short-term loans and lines of credit
Short-term loans and lines of credit can provide a reliable source of funding during peak periods when cash flow is strained. These financial products are typically offered by banks, financial institutions and online lenders and can help businesses cover costs associated with seasonal changes.
Some tips for using short-term loans and lines of credit responsibly include:
- Setting up a repayment schedule that is realistic and achievable
- Understanding the terms of the loan before signing the agreement
- Sticking to the payment schedule and avoiding late fees
Credit control software
Using automation and effective credit control software can help streamline your business’s invoicing process and ensure that you receive payments on time.
By using credit control software, businesses can set up automated reminders for customers who are late in making payments or have exceeded their payment terms.
This can help encourage customers to pay on time, allowing businesses to maintain stable cash flow in the face of seasonal fluctuations.
Chaser's award-winning credit control software offers businesses the tools they need to manage their cash flow and ensure that payments are received on time.
The system is easy to use and provides a range of features, including automated reminders, customer segmentation, financial reporting and more.
These tools can help businesses stay on top of their cash flow and manage any associated financial pressures during peak periods.
Final thoughts
Seasonality can represent both an opportunity and a challenge for businesses. Not properly preparing for seasonal changes can significantly impact your business’s cash flow.
However, taking the proper proactive steps can help ensure that your business is able to manage cash flow during seasonal periods, ensuring long-term financial success.
By understanding what your business needs, exploring possible revenue streams and making use of financial services and practical tools like Chaser, you can make sure your business has all the support it needs during peak and off-peak periods.
For more information on how Chaser can help you manage your accounts receivables, book a demo with us today or start your no-obligation 14-day free trial.
