Questioning how to manage seasonality in your business? You're not alone.
Finding an answer to this question is important: As revenue or expenses rise and fall with the time of year, so does business cash flow.
But there are ways to manage seasonality. Consider using the following tips.
1. Review the last three years of your profit and loss statements.
One way to manage seasonality is to look at how sales and expenses have changed month to month and quarter to quarter over the last few years.
Break these months and quarters down into what percentage of sales (and expenses) each time period represents of the entire year. These differences will show the seasonal changes in both sales and expenses in order to create an annual budget that reflects it. For example, if the fourth quarter represents 50 percent of a company's revenue for the year, than it's a heavily seasonal business.
If this is the case, the organization needs to make sure it has enough resources to meet demand during busy parts of the year and then minimize variable expenses during slow times. (Don't forget to look at seasonal expenses like annual insurance premiums and months with three employee pay periods.)
2. Track the last two years of cash-flow statements.
Plot out where the biggest business cash-flow changes occur on average during the year on an operating basis (i.e. do not include pay down of loans unless these have annual requirements).
Just because there is more revenue in some months or a quarter, it does not mean that business cash flow will reflect it. Customers may have a different payment cycle than when the revenue is generated.
For example, there are many companies that pay invoices early in December, so they can be included as a business expense in their tax return. Some companies also reduce their inventory during slower times or ask their vendors for longer terms to assist with cash-flow management.
3. Incentivize customers to buy during the slow season.
Many companies only have so much capacity for revenue during their busy time of year. To manage seasonality, incentivize customers to buy when business is slower to take advantage of idle capacity.
Retailers can use promotions like “Christmas in July," which builds the sales hype that is normally reserved for December. Other companies may offer complementary services like snow plowing and landscaping to balance out seasonal revenues.
4. Lower overhead during slower times.
If a company knows that January is always their slowest time, they can systematically try to lower their overhead to match revenue.
Review the expenses that increase during busy times, and determine how they can be reduced or eliminated during slow periods. For example, many companies use temporary or freelance staff during peak times instead of hiring full-time employees, so they are not part of the company's cost structure year-round. Other companies shrink their hours of operation, require employees to take vacation and reduce internet services and other utilities during slower periods.
5. Establish a line of credit.
There are many times that companies use lines of credit to fund their expenses during slow times and then pay this off during the time of year when sales are high.
If you decide to use this type of facility for cash-flow management, make sure that your credit line is paid down to zero at least once a year, so it does not become part of the permanent financing of the business.
Remember: These tools can help manage seasonality if they are used to proactively refine a company's cash flow management forecast on an ongoing basis.
Read more articles on cash flow.
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