Some businesses see steady sales throughout the year, while others see their revenue concentrated into seasonal segments — think tax preparation offices or ski lodges. These businesses have particular challenges when it comes to managing cash flow, since expenses have to be paid throughout the year, even when little revenue is coming in.
We asked Rita Cheng, a financial advisor who works with small businesses and a member of NerdWallet’s Ask an Advisor network, about ways small businesses can use these high-revenue periods not only to fund year-round needs, but also to bolster the company’s long-term prospects.
What steps should businesses take to prepare for a seasonal downturn?
When the money is coming in, it’s important to be strategic with your expenditures. Here are a few of the options business owners should consider:
- Establish a reserve operating fund or emergency fund. This is solid, prudent planning — you want to make sure you put money away for a rainy day rather than spend it all when you get it.
- Anticipate major expenditures over the next several years, such as equipment that needs to be upgraded, new leases or technology. Allocate for these expenditures so that you’ll have the full amount available when you need it.
- Reward key employees who contributed the most to the company and ensure they understand the bonus or profit-sharing plan is a function of the company’s success and is discretionary. This is a great way to retain key employees and make sure everyone’s incentives are aligned.
- Understand the key drivers of your business success; consider reinvesting a portion of the profits to increase investments in marketing and sales in those areas.
What other things should small businesses do to manage seasonal shifts?
The key to managing these seasonal revenue cycles is to educate yourself about your market and your opportunities. Here are a few ways to do that:
- Explore on-demand partnerships with partners and independent contractors instead of having full-time staff. These opportunities might arise in areas like marketing, technology and bookkeeping. You may even consider outsourcing your chief financial officer.
- Study competitors and larger firms to understand their practices and resource allocation during your slow periods.
- Ask suppliers and business partners for guidance on the slower revenue times to glean information that can help improve sales during the downturn.
- Consider offering complementary products and services so that you can have more consistent revenue throughout the year — for example, a landscaping company that offers snow-removal services in the winter. Another example is a swim shop. Obviously such a shop sells swimsuits, goggles and caps in the summer, but it might also outfit high school swim teams, meaning it has business nearly the entire school year.