Dealing with Seasonal Cash Flow Dilemmas

August 9, 2013 by Ed Becker

Virtually all businesses encounter cash flow setbacks at one point or another. Pool maintenance services are hit hard during the winter months, retail shops see sharp declines after the holiday season, and most tax preparers close up shop after the April 15th deadline. A quick glance at the books of any business will show seasonal trends in revenue and expenses to varying degrees.

Cash flow is the lifeblood of a small business. When major cash flow setbacks can be predicted, there are several very effective methods to help stop the bleeding to keep your business alive until the next busy season.

Build Cash Reserves

It goes without saying, but building cash reserves is the top priority for businesses affected by seasonal trends. Ideally, you should have enough cash on hand to cover at least three months of business expenses – including your income draw. Any less and you are operating in a liquidity danger zone.

If you suspect your cash reserves are looking a little weak as the busy season comes to an end, you may need to seek out a business line of credit. Financing always comes with strings attached, so tap this resource only if absolutely necessary. The business line of credit will be the last line of defense from insolvency.

Effective Bill Collection Processes

Most small business owners didn’t launch their enterprise with aspirations of tracking down customers for past due payments. Unfortunately, bad debts are a common occurrence in the real world and they can be a real cash flow killer. Many of these debts can be collected and settled with a little extra effort in the bill collection department. Services like ZenCash can put collections on autopilot. This app integrates with QuickBooks to track outstanding invoices and take a structured set of steps to ensure they are paid in a timely manner.

Break Large Projects into Milestone Payments

If you operate a service-based company, it is essential to negotiate favorable terms in your contracts – not the least of which is the contract’s payment terms. If XYZ General Contractor is hired to build a pool, the first payment should come due well before the water is poured. In this scenario, milestone payments for digging the hole, laying the concrete, and installing the pump should come before the customers dive in the water. This payment model insures that the contractor is maintaining steady cash flow and mitigating the risk of bad debts.

Negotiate Flexible Terms with Vendors

Take a look at the payments you’ve made to vendors over the last year. Try to structure your purchases from vendors to correspond with cash flow. In other words, purchase inventory and equipment when you have the cash on hand. Many vendors will also offer discounts for early payment, so take advantage when cash flow is strong and minimize payments when cash flow is weak.

Cash flow is perhaps the most crucial aspect of financial management for small businesses. Avoiding the potentially catastrophic impact of poor cash flow can usually be solved with basic planning. A disciplined effort towards building cash reserves, collecting bad debts, and contract negotiation will keep you safe during seasonal slowdowns.