Is there a secret to managing cash flow in a seasonal business?

The busy season is over, it’s been a good run, and now it is time to take a deep breath, kick your heels up and enjoy the off season.  Often that tranquil state of mind is only fleeting as other doubts start to creep in.  You wonder how slow the slow season really will be?  You worry, well I have lots of cash in the bank now, but how long will it last?  What can be done to better manage these worries?  This is where budgeting and cash flow projections can be tremendously useful.

A what you might say?  Well let me break it down a bit further.  You’d like to predict the future.  Of course no one can do that with absolute certainty, but there are a lot of things that we know will happen with enough certainty to be able to make a pretty good guess as to where a business will be in 6 to 9 months.

Generally these educated guesses rely on 3 components: variable activity, fixed costs, and new costs and revenues.

Variable Activity

Future variable activity can be derived from comparing past trends in the business to estimate when certain activities will happen in the future.  This historic data generally comes from well kept accounting records, also known as bookkeeping.  These records provide a monetary footprint of business activity such as when do customers make purchases or when do suppliers need to be paid.  Well maintained accounting records can provide a wealth of data that provides a historical basis for future predictions.  By using trend analysis over the previous period’s activity we can make predictions about future activity.

Fixed Costs

Fixed future costs are costs that are known with confidence that will happen.  Generally these can be annotated fairly quickly because they are usually large in nature, and often tied to a contract, such as rent, utilities, taxes, loan, and lease payments to name a few.

New Costs & Revenues

Estimated future costs and revenues are generally new activities that have no historical precedent so they will not show up in the accounting record history.  Items in this category might be the cost and or revenue generated from developing a new product line, or hiring a new designer or sales person.  While no one can predict exactly what will happen often different scenarios can be considered to come up with a best and worst case scenario.

Now combine all 3

By combining these 3 categories of items into a budget you can fairly quickly gain insight into where you expect yourself to be in the midterm.  Our favorite accounting tool is Xero.  Included in the software is a simple budgeting tool, that very nicely provides basic insight.  Xero also connects to a host of other applications that will automatically create more in depth forward looking projections.