7 Cash Flow Pitfalls of Seasonal Businesses
Seasonal business owners have many more challenges than your typical business. Being ill prepared and not correctly navigating the off-season can be fatal.
So what are some of the ways to succeed as a seasonal business?
1. Budget, budget, budget.
Forgetting to make a budget or not incorporate the length of your peak season, or forgetting unavoidable pre-peak season expenses during a low period of revenue can harm your business. People generally overestimate peak season revenue, and underestimate off-season expenses. Because of this, use any historical cash flows to better inform your budget.
2. Gain momentum with crowdfunding.
Crowdfunding is a way to reward people who provide cash for your business. It is also a way to market your business via word-of-mouth. At one level, crowdfunding can be essentially a presale of your business’ product or service. For instance, say your seasonal business is boat rentals and you will need some new boats for the start of the season. You could crowdfund the money for the new boats and in return those people would get boat rentals when the season rolls in.
Those people will also probably tell their friends about it. A larger and more involved level of crowdfunding involves rewarding investors with equity in your company instead of with product or incentives. These investors rarely have a say in how the business is run, so they are referred to as silent partners. The amounts which crowdfunders contribute is often small, but since there can be many of them, the total amount of cash available to the business can be large. These investors want what you want—for your business to succeed. You can bet they’ll be telling everyone they know about your business.
3. Make savvy negotiations.
One of the only benefits of having a slow-season is that you have more time to work on business development. The off-season is a great time to negotiate with customers and suppliers. Negotiate with customers to be paid at least a percentage of their invoices to be paid upfront; this will increase cash flow and cover the gaps caused by those slow-paying customers. With your suppliers, negotiate to make payments during or just after your peak-season when you have a lot of cash on hand.
4. Plan during the off-season.
When your primary business function is slowed or stopped in the off-season, use that time to better prepare for the next peak season. One important preparation is to shop around for better suppliers of all kinds. One universal supplier across all industries is a banker or other alternative financier.
5. Don’t rely too much on one bank.
While some traditional financing products can work for seasonal businesses, not all of them do. Fortunately we live in an age on increased choices of alternative finance. Since seasonal businesses can vary greatly in their funding needs, it is important to talk to several different funding providers and use your budget to determine the best choice for you.
Even some successful seasonal businesses have trouble financing and funding their operations. Traditional banks often expect fixed payments on loans they make to seasonal businesses, even though cash flow varies by season. This variation introduces an additional risk that any lender has to consider.
6. Treat invoices as assets.
Many seasonal business owners have no idea their accounts receivable have value other than to their own business. A Factoring Loan is a business loan where a financial intermediary purchases accounts receivable from a company; essentially a business loan that pays the business the value of the invoice minus a discount for commission and fees. The factoring company advances most of the invoiced amount to the business immediately and the balance upon receipt of funds from the invoiced party. Savvy seasonal business owners know this.
7. Leverage your future revenue.
During the off-season it can be hard to justify large purchases based on your little revenue. Fortunately you can get funding based on your business’ future revenue called a Merchant Cash Advance. With a Merchant Cash Advance the business receives a lump sum upfront in exchange for a fraction of future credit and debit card transactions. Ultimately the business will pay back more than the initial lump sum. While this method is more expensive than a traditional bank loan in most circumstances, if a business will have little revenue in the coming months, it can be a prudent option.
Running a seasonal business has many more challenges to managing cash flow then a typical business. The best thing a business owner can do is to educate themselves about the types of funding available to them. If you want to learn more about different types of funding available to you and ask questions of lenders and funders, go to Bankmybiz.com. To see some examples of crowdfunding campaigns, head to indiegogo.com or kickstarter.com.