Business Seasonality: How to Avoid Seasonal Cash Flow Problems

Seasons change, but for some businesses, one challenge remains the same: seasonal cash flow problems.

While many businesses struggle to manage cash flow, several types of businesses may be additionally affected by seasonal fluctuations, such as:

• Businesses that are weather or season dependent, such as snow removal businesses, landscapers, and some construction firms
• Businesses tied to tourism peaks or a holiday season
• Agencies and creative businesses reliant on client budget cycles
• Businesses tied to specific yearly events, such as accountants at tax season
• Businesses affected by fluctuations in supply, such as retailers

Even year-round businesses can experience seasonal ups and downs—grocery stores, for example, may sell more burgers and hotdogs in the summer, more candy around Halloween, and more turkeys around Thanksgiving.

Regardless of what forces dictate your business’s standard seasonal fluctuations, it’s imperative that seasonal businesses have enough cash on hand to make the most of their peak profitable periods. In order to meet these predicted spikes in demand, businesses typically have to increase their production power by spending more on raw materials, labor, machinery, and equipment, which in turn requires advanced planning and careful budgeting throughout both the off-season and the previous year’s peak season.

Unexpected expenses, lower-than-anticipated revenue, or large purchases can complicate cash flow for seasonal businesses. Small business loans can help businesses overcome these challenges, but it can be difficult for seasonal enterprises to secure the financing they need from traditional lenders like the SBA or banks, particularly during their slow season when cash flow is depressed. Alternative lenders like Greenbox Capital® have more flexible approval requirements that consider cash flow alongside factors that demonstrate the overall health and potential of your business, and are more likely to fund seasonal businesses.

The most important thing small businesses can do—seasonal or not—is to track their cash flow year-round so they can better prepare for anticipated lulls. If your business is seasonal, your down-times should be predictable, which means you can plan for them well in advance and use these lower-demand periods to your advantage without draining your cash reserves.

In this post, we’ll share 10 tactics businesses can use to combat business seasonality and alleviate seasonal cash flow problems, including:

1. Maximizing peak season demand
2. Managing late-paying customers
3. Offering new services during your off-season
4. Watching operating costs closely
5. Using your off-season effectively
6. Creating a cash flow forecast
7. Managing inventory
8. Creating plans for best- and worst-case scenarios
9. Seeking financing proactively
10. Building your savings

Let’s get started.

The more revenue you can generate during your peak season, the better off you’ll be during your slow season. There are several ways to maximize your peak season profits to help even out seasonal fluctuations in business, such as:

• Upselling services to existing clients in order to generate more revenue per contract
• Asking for referrals from existing clients so you can expand your client base
• Investing in online or traditional advertising during your peak season, or just before, to attract new business
• Creating a sense of urgency before your seasonal peak arrives by encouraging new and existing clients to book before time slots fill up or purchase before inventory runs out

Often, revenue-generating strategies like these require an up-front investment of capital to promote your business, acquire raw materials or inventory, or hire more staff to meet increased demand. Working capital funding like merchant cash advances is ideal for funding initiatives that will increase your revenue without straining your cash flow.

Merchant cash advances are an unsecured form of financing known as a “purchase of future receivables”, in which a business receives a cash advance in exchange for a portion of their daily or weekly credit and debit card sales until the advance is repaid. Because repayments are tied to your sales, MCAs are ideal for funding initiatives that will increase your revenue because increased revenue means faster repayment. This structure can also be helpful for businesses during their slow periods, since repayments will be reduced in proportion to sales.

Delays receiving payments from clients can exacerbate cash flow problems for seasonal businesses. Late payments may not be overly troublesome when it’s your peak season and money is rolling in, but it can create problems down the line when business slows and your revenue is trapped in accounts receivable.

There are a number of ways small businesses can combat business seasonality by better managing late-paying customers, including:

• Sending invoices promptly once a job or contract is complete
• Sending reminders for late payments—some software will even handle this for you automatically
• Shortening your accounts receivable periods
• Offering discounts for early payment
• Making it as easy as possible for clients to pay
• Asking for up-front deposits for large projects

It can be difficult for business owners to manage administrative tasks like invoicing when they’re busy operating a business. Investing in financial and business management software can help you send invoices quickly (or even automatically), and the right software can even make it easier for clients to pay their invoices online and on-time without requiring awkward follow ups.

If your business typically closes altogether during your off-season, you could consider keeping your doors open and offering new services during these months. For example:

• Landscapers could offer indoor plant or living wall maintenance, autumn or winter tree pruning, or snow removal
• Bike shops could shift their focus from bike sales and rentals to bicycle maintenance and upkeep, or even winter sports gear
• Hotels and other accommodations could rent spaces for holiday parties or host business events
• Food trucks could offer delivery or pickup during colder seasons
• Businesses in many industries could add ecommerce functionality to their website in order sell products your customers use year-round

If you’re thinking about offering new services during your slow season, consider your clients’ perspectives and behaviors. What do they do during the off-season that your business might be in a position to help with? Identify gaps and start by offering pilot programs to a few key clients—if it goes well, consider expanding the program the following year.

Rent still needs to be paid, utility bills keep coming in, and you need to pay yourself—even when your business isn’t generating revenue.

Keep a close eye on both fixed (rent, insurance, salaried payroll) and variable (utilities, hourly wages, material costs and inventory) operating expenses throughout the year so you can better predict fluctuations and make sure you’re prepared with cash on hand. For example, wages may be higher during busy seasons when you have to hire extra part-time staff, or utility costs may be higher during seasons when you have to run the heat or air conditioning longer. Being aware of these patterns will help you create a budget that factors in the peaks and troughs so you can identify where and when you can cut back.

There are a number of cost-cutting tactics you can you can employ to manage seasonal fluctuations in business, including:

• Hiring part-time employees only for the peak season
• Negotiating better payment terms with your vendors
• Leasing equipment rather than buying it, or leasing out your equipment during seasons when you don’t need it
• Renting out unused office space
• Looking into skip payment leases, which allow you to make payments during peak periods but stop payments during slow times
• Reducing business hours so you work shorter days and lower wage costs

Off-season slow times are a great opportunity to identify problems that may be stopping you from reaching your peak-season revenue goals. Use your off-season to:

• Create a cash flow forecast for the next year. Read our next tip for more on cash flow forecasting.
• Develop new marketing campaigns so you can generate as much revenue as possible during your peak season.
• Rebuild your website to make it easier for clients to book, purchase, or pay invoices online.
• Gain a deeper understanding of your bills and invoices so you can better budget for recurring expenses and how much revenue you’ll need to cover them.
• Review payment terms with your creditors so you can prioritize bills that have penalties for late payment or bills that offer incentives for early payment.
• Compare the most recent peak season over previous years—this kind of comparative analysis can help you assess whether to ramp up your staffing or cut back in future years, or adjust how much inventory you order.
• Review your inventory needs so you can stock up strategically—purchase inventory in bulk when you know you’ll need it, and avoid stocking up on items that aren’t selling.

Cash flow forecasting is the process of estimating your business’s future financial position by thoroughly analyzing sales income, expected expenses, and other sources of cash. Effective cash flow forecasting helps you spot cash shortages before they become a problem, and it can also help you avoid overspending by removing the guesswork on how much money you have to spend each month.

Using your business’s budget and tracked spending, create a cash flow forecast for the next year so you can more accurately predict cash flow and proactively identify potential gaps and cash flow problems. Set aside time to refine your forecasts monthly—at the end of every month, update your forecasts and add a new month to the end so you’ll always have a rolling prediction of what’s to come. Rolling forecasts can also help you take advantage of higher revenue periods when there is more cash on hand.

Be as honest as you can when doing your cash flow forecast. Don’t overestimate your peak-season revenue or underestimate your off-season expenses. Use the previous years’ information to form a baseline, and add a cost buffer to factor in the rising cost of utilities and inflation in 2022.

As supply chain issues and inventory volatility persist in 2022 and into 2023, inventory management will remain an ongoing challenge for businesses in any industry, including those that don’t typically contend with business seasonality. One way to combat these issues is to maintain buffer stock, but for seasonal business, unsold inventory or unused materials can dry up your cash flow by increasing your carrying costs.

Instead of holding onto unused materials or unsold inventory, seasonal businesses may benefit from end-of-season sales that help recoup some costs. Talking to your suppliers can also help you mitigate seasonal cash flow problems caused by unsold or unused inventory or raw materials—some suppliers will even allow you to return merchandise for a credit against next season’s orders.

Taking the time to create two budgets—one for strong cash flow, and one where you need more of a cushion—can help you weather any cash flow fluctuations caused by business seasonality. Create cash flow forecasts for best-case scenarios like hiring a new staff member so you can take on more business, as well as for worst-case scenarios like losing a client. Considering all possible contingencies can help you plan for your growth and avoid any major cash flow problems.

Creating plans for best- and worst-case scenarios can also help you make decisions during tougher times. If you already have thoughts and ideas in place for how to manage sluggish cash flow, such as planning to apply for financing, you can approach these strategies with more preparation and less stress and confusion.

Acquiring third-party financing for working capital can be an effective way to shore up cash flow during the off-season.

Having a clear understanding of your sales cycle and annual cash flow peaks and troughs, as well as detailed cash flow forecasts, will help you secure financing by showing lenders that you are proactive and engaged, rather than simply reacting to unexpected expenses.

Merchant cash advances are a popular funding solution for helping to manage business seasonality. Business line of credit for small business can also be beneficial for managing seasonal fluctuations. Seasonal businesses can withdraw from and repay their line of credit as needed and will only ever pay interest on the amount borrowed, similar to a credit card but with higher limits and lower fees.

Not sure what to do with all that extra revenue you generated during your peak season? It can be tempting to re-invest it all right back into your business, but for seasonal businesses, it pays to save or invest at least some of it for leaner times.

Ideally, you should have enough cash on hand to pay for six month’s worth of business expenses. Seasonal businesses can improve their cash cushion by:

• Generating as much revenue as possible during their peak season
• Strategically cutting operating costs during off-peak months
• Collecting payments from clients as promptly as possible
• Paying suppliers prudently—that means paying your bills on time, but not necessarily early (unless your supplier offers early payment incentives), so that you have cash on hand when it’s needed

Cash flow problems are one of the biggest challenges faced by small businesses that deal with business seasonality. Cash flow forecasting and adopting revenue-generating techniques that enable your businesses to capture more business and collect payment faster can help alleviate cash flow problems caused by seasonal fluctuations in business. Accessing third-party financing can also be a helpful cash flow management strategy for small businesses.

With streamlined online applications, flexible approval requirements, and fast turnaround, alternative funding can help small businesses access the working capital they need to successfully manage their cash flow. Invoice factoring and business lines of credit are two of the most common financing options available to help small businesses maintain positive cash flow, but other alternative financing options like merchant cash advances can also provide working capital when you need it without straining your cash flow.

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