Seasonality of sales and cash flow can have a dramatic and sudden impact on every business. Your business can ride a wave of cash flow when the months are good — and then all of a sudden that cash flow can dry up.
When we think of seasonality we naturally think about the weather. Restaurant and tourist-based businesses typically do well during the summer months when the streets are lined with visitors and the beaches are packed with the holiday crowd. Retailers do well during the festive months of Christmas, Easter and Mothers Day, but may struggle in between these shopping seasons. However, seasonality can come in other forms. For example:
Economic seasonality: When an economy is growing and vibrant, people have money to spend and your business cash flow can be great.
Interest rate seasonality: When mortgage interest rates are on the rise and credit gets tight, people tend to cut back on discretionary spending and luxuries. This can put the brakes on customers spending money with you.
Business confidence seasonality: Business confidence in Australia is a huge indicator of overall spending in the economy. When confidence is flat, money and cash flow dry up as businesses cut back on reinvestment and expansion. If your customer base deals in mainly the business-to-business space (B2B), then a drop in business confidence can impact on your cash flow. Likewise, new government incentives for small business tend to drive up business confidence and spending activity, which can ultimately increase your cash flow.
As a business owner, you need to consider all forms of seasonality that can impact on your business cash flow. Just because you may not run a restaurant or retail shop doesn’t mean seasonality will not affect you. Think broader, and be proactive in protecting your vital business cash flow.
The good news is that you can take a few simple steps within your business to help mitigate the impact of business seasonality.
1. Make hay while the sun shines
During peak times, I see countless businesses crammed full of customers and people lined out the door waiting to be served. A lot of small businesses get very busy during the high season and then drop the ball when it comes to customer service. If they have to queue or wait too long to get served, many customers give up and go and spend their money elsewhere. Don’t let this happen to you!
During peak times in your business — even during busy times of the day — make sure you have more than enough staff to capture every sales dollar that walks through your door. Your customers are willing to pour money into your pockets, so be ready to cater for that high volume of sales traffic during the day. Gear up in advance with staff and stock so you can keep the cash registers ringing.
2. Stash the cash
To help your business during low cash flow periods, make sure you build up a reserve of cash when cash flow is good. If you have mastered step 1 above and have taken advantage of every customer dollar while the cash register is running hot, it will be easier for you to build a decent cash reserve. Setting money aside will tide you over during those gloomy weeks or months when customer foot traffic has dried up or the phones stop ringing.
Put some money aside for paying your GST and other business taxes when they fall due. Don’t fall into the trap of spending all your cash during the peak times, only to leave the cupboard bare during those lean months when the taxman comes knocking.
3. Look ahead
Like a ship’s captain on the deck peering through a telescope, you should be able to see an impending storm in your business when sales could start to decline and your cash flow might begin to dry up. A good business owner, especially if they have been in business for more than a year, should be able to foresee a drop in sales and subsequent business cash flow.
Talk to your customers. Try to judge their business confidence. Read the business sections of the newspapers and gauge how your industry is going. Follow the Reserve Bank announcements and track how inflation and interest rates are trending. By following these economic patterns, you should be able to gauge peaks and troughs that could impact on your business. Then provide for it in advance.
4. Keep a few promotional aces up your sleeve
Offer promotional discounts during the months of the year your sales are going to be flat and your cash flow will decline. Create some targeted marketing campaigns in advance that you can quickly promote to your customer base if needed. Smart and quick sales campaigns can give your business a vital boost in cash flow when all your competitors are struggling. Being proactive can start cash flowing again in your business.
5. Hire a flexible work force
For most businesses, labour cost is their largest expense and can soak up valuable cash flow. Make sure you have a labour model that allows you to be flexible with your staff during peak periods as well as during the lull. Don’t watch cash flow being lost on wages for idle staff. Be nimble and be quick to react by having a flexible roster system for your staff so you can send staff home or have less staff during low cash flow and sales periods.
Every business, no matter what the industry, can and will be affected by seasonality. As a business owner, look at the big picture and don’t be short sighted by thinking only about the typical seasonality factors. Maybe you do rely on the holiday traffic and the tourist dollar, but don’t think your business is immune from other forms of seasonality. New business laws, consumer confidence and economic factors can hit your business cash flow just as hard. However, taking a few simple precautions and implementing some key strategies in your business can boost your business cash flow and reduce the volatility in the business landscape you operate in.
Find out more about how online accounting software like MYOB Essentials can give you a clear overview of your cash flow to stay on top of seasonal fluctuations.