In the Spirit of the Season:
Making Sure Seasonality Figures in Your Cash Flow Forecasts
by Mark Henricks
Almost all businesses are seasonal to some degree. Swimsuits sell best in summer, gift sales surge before year-end holidays and lunch boxes peak during back-to-school season. Services ranging from tax preparation to health insurance are also highly seasonal. But seasonality also affects less obvious businesses like new-car dealers, which are busiest when next year's models come out each fall, and real estate brokers, which do most of their business in spring and summer.
When these businesses don't include seasonal fluctuations in a cash flow in their forecasts, they risk running out of cash during a slack period, just when it's time to ramp up for the next busy season. That's why one of the most critical elements of an accurate cash flow forecast is accounting for seasonality.
Understand Your Seasonality
Identifying seasonality is generally straightforward. Examining monthly historical cash flow figures should quickly give clues as to which months are the busiest. However, one-time bumps or declines in cash flow may distort this perception. So compare averages for a given month, quarter or other period to the historical averages for the entire year.
Also be aware that historical data may not tell the whole story. Consider future one-time events, such as a product supplier's planned price cut, as well as intuition, judgment and knowledge about general economic conditions when forecasting seasonal effects.
Plan for Seasonality
Seasonal fluctuations in demand affect a wide range of business functions, from formulating production schedules to purchasing materials, ordering inventory and setting sales quotas. As a result, plans for managing the effects of seasonality can and should include a variety of actions.
Some measures that can be taken to deal with seasonality are to speed up collections when cash flow looks like it's about to slow down and to reduce stock levels to better match sales during a slow period. Businesses can also tighten purchasing policies, seeking better terms on purchases and putting money aside to tide the company over in a lean period.
Another way to prepare for seasonality is to ensure access to adequate credit. Because it can take time to apply, receive approval and activate a line of credit or other funding facility, arrange for credit well before the need arises. What's more, credit applications are all about proving the health of your business, and it's much better to secure a loan or credit line before when your finances are in their best shape possible.
Save for a Rainy (or Sunny) Day
Businesses should also attempt to self-fund for seasonality to the extent that is possible. When cash flow is good, put money aside for the slow times that you know are coming.
There's no way to prevent swimsuit sales in Wisconsin from falling off in December, or tax preparation requests to drop off in July. But that doesn't mean businesses affected by seasonality need to be negatively impacted by the ebb and flow of demand. By identifying and planning for seasonality, cash flow can be well managed from the height of your busy season to the quieter days that may follow.
About This Author
Mark Henricks is a freelance journalist covering business, entrepreneurship, technology, personal finance, health and fitness for leading publications.
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