Cashflow Planning for Seasonal Businesses is Vital

I generally post on “softer” topics like management, leadership, or something similar, but this one is much more numbers based.  (By the way, “soft skills” is such a misnomer, but that is a discussion for another day.) 

In the last month, I’ve had discussions with three business owners that, due to their industries, have significant slow periods each year.  To counter an obvious potential question before you ask it, “Does that mean it’s a bad business to be in?”  The answer is, NO, definitely not.  Wouldn’t we all want to be able to make a year’s living in less than a year?  Most people would say yes.  That being said though, it certainly comes with challenges. 

Planning and discipline (click for former post) are vital for continuity in a seasonal business.  If you want to have a business next year, you must save enough cash to make it through until business picks up again.  In fact, even that is incorrect.  You don’t need to merely save enough cash to make it through the slow season, you really should save enough cash to make it through the slow season... AND THEN SOME.  One thing that is certain in business is uncertainty.  If anything happens that causes the slow season to extend, you need to have enough in reserves to make it through the additional time without having to make drastic decisions.  Keeping those cash reserves requires discipline. 

The planning portion comes in when determining how much is needed.  To make this very practical, let’s look at my former recruiting business.  Without boring you about the details of permanent placement (headhunting), I had calculated that it generally took 60 days from when a client formally gave us a project, to when we could expect to receive payment.  Did some happen faster?  Of course.  However, some happened slower as well.  I found that 60 days was by far the typical period though, so that is what I used for planning purposes.

You would suspect that I kept 2 months of expenses on hand at all times then, correct?  NO. That would be wrong.  I had employees that I was responsible to pay, and my family had developed this habit of eating on a regular basis as well.  In addition, I had a severe allergy to removing money that was previously put into a savings or retirement account.  For these reasons, I doubled the amount and kept 4 months of expenses on hand at all times.  Some people may believe that investing that extra money would have been wiser.  I would argue that the best investment I could make with that money was to invest in insuring that the company continued to operate, continued to grow, and that my mindset never had to sway into desperation mode.   

I write this because it pains me when I hear of talented business owners, who care greatly about their businesses and their people, having challenges that could have been prevented.  Are there other problems that may inhibit cashflow?  Of course.  Is it possible to have cashflow issues even with the best planning?  Double-of-course... we have just lived through some of the craziest years in economic history.  However, I would say that the majority of cashflow issues can be avoided with the appropriate amount of discipline, planning, and naturally a little prudence. 

If you need assistance with planning for your own business, please reach out to us on our Contact Page. 

As always, I truly do wish you the best in your business. 

Mark Goldman