Managing cash flow in a seasonal business – Guest Blog

Once again Alison Wren from Paprika Marketing is sharing her experience with us. This time she is helping business owner with seasonal businesses to manage their cash flow.  Alison has a wealth of experience and I am honoured she is writing for my site as I know how useful her previous blog was for all of you.

Over to Alison….

Alison Wren Guest Blogger

Alison Wren Guest Blogger

You’ve probably heard that more small businesses fail because of a lack of cash or cash flow rather than a lack of profits. There are lots of reasons for this, but one of the most common is a failure to cope with seasonal trading patterns.

Just about every business will have its own seasonal issues to contend with. There are the obvious ones like tourism and weddings, while just about every accountant I’ve met is having a nervous breakdown in January but putting their feet up in August. For others it may not be so marked (or predictable) – but it’s probably there.

My previous business was in the wedding industry and our sales income each year looked something like this:

How Alison's former company cash flow looked

How Alison’s former company cash flow looked

Manic in January to March followed by a steady drop through the year until December when it went deathly quiet as everyone forgot about weddings and concentrated on Christmas.

December was always tough – the quarterly rent was due on Christmas day, staff wages still had to be paid and sales were invariably below break-even point.

With most of our profits made in the first 3 months of the year I had to estimate how much I would need to hold back until December and I usually got it wrong.

Looking back, these are the lessons I learned:

Know the seasonal pattern for your business

When you are starting out you can make some intelligent predictions, but long term you will need to learn from your own experience. Recognise that it can change. In the last year before I sold the business, December was 50% better than usual – for no obvious reason!

Understand your working capital needs

Working capital is the cash you need to fund the day to day running of the business. If you buy stock, employ staff or rent premises all of these will need to be paid for, no matter what your sales look like.

My business sold products online so we bought stock and we also manufactured about 30% of our products. As we grew, I was able to negotiate discounts with suppliers but this often meant placing larger orders. This increased profitability but meant I needed more working capital.

Keep on top of your figures understanding cash flow

It’s vital to monitor your profit and loss and your cash position throughout the year. If you struggle with accounts, then think about using a freelance bookkeeper to manage them for you and ensure that you get a cash flow forecast

I kept a spreadsheet which looked at my cash position for the next 12 months. Each month I’d enter the latest income and expenditure figures and it would adjust my estimates for the months ahead. If I was going to be short of cash for any month the figure would turn red!

Unpleasant, but it’s much better to know in August that things are likely to be tight over Christmas than finding out in November.

Have a backup plan

Do you have a Plan B if you find yourself in the situation of running short of cash?

I kept an overdraft facility open even though I only used it for a few weeks a year.

Be realistic

There’s always the temptation to think that a nice juicy increase in sales is just around the corner, but you can’t rely on it.

Looking back, the years when I had a particularly stressful December were usually the ones where I was over-optimistic in my sales forecasts.

Alison Wren escaped corporate life to create ecommerce business The Wedding Crafter in 2004, growing it from back bedroom start-up until selling in Spring 2011. She now runs Paprika Marketing, creating and implementing effective online strategies for small business. You can follow Alison on Twitter @PaprikaMktg

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