Every business owner struggles with an unfriendly cash flow at one point or another. However, if your turnover is strongly seasonal, these problems can be magnified a thousand-fold.
Continuing to meet your outgoings – salaries, rent, rates, bills, loan repayments, tax demands – during the quiet months can easily become a nightmare. But how can you make sure you have the cash in hand to ensure you’re still in business for your busy season?
Consider your cash flow needs in depth
The first step is to know what you need and when. Unlike your balance sheet and profit and loss statement, which represent financial snapshots of a particular moment in time, your cash flow statement should indicate when money will flow into and out of your company over a given period.
To prepare such a statement, you should review your income and expenditure over at least the last year – and preferably the last two or three. Once you have this information to hand, you can forecast what you will need to spend over the next 12 months – and how much you can reasonably expect to earn. In particular, don’t forget to factor in the need to stock and staff up just ahead of the seasonal upturn, when your expenditure will ramp up before your income does.
At the same time, make sure you factor in a cash cushion for any unexpected expenses. Even if it hasn’t happened for a few years, a key piece of equipment could fail outside warranty or your premises might need urgent repair.
Make sure you establish an emergency fund
To make sure you can survive such setbacks, you should establish an emergency fund – and this should represent at least one month of average expenses. If you can accumulate the cash to cover three months’ expenses, even better,
Needless to say, putting together such a significant amount of money will require an iron will and some careful budgeting. One important step is to trim your expenses during your peak months, allowing you to set some extra cash aside. Make sure you audit your expenditure carefully, cancelling any recurring but barely necessary expenses and being careful not to take on larger premises, more people or bigger stock holdings than you actually need.
You’ll need to be similarly self-controlled when depleting the fund, and will need to define what constitutes an emergency fairly rigidly. Don’t be tempted to use the fund to pursue any relatively marginal business opportunity that comes along – it’s there to protect you against a rainy day.
If all else fails, arrange a line of credit
Even with your emergency fund in place, you could still find yourself facing financial difficulties. A line of credit could be the answer. Much more flexible than a short-term loan, a line of credit acts like an overdraft, allowing you to draw down cash and repay at will. The interest rate is likely to be quite high, but the good news is that if you don’t use the facility, you don’t pay.