No matter how different businesses are, there is one common trend that all business face. Over the life of the business, every business will experience highs and every business will experience lows. The journey of owning a business has often been compared to riding a roller coaster; You’ll go up, down, upside down, left and right.
The worst impact is felt by seasonal businesses. For seasonal businesses, the roller coaster ride is a little more predictable. For example, if you’re small business selling swimming equipment at the jersey shore, you can guarantee that your summers will be busy and your winters will be slow. These type of businesses experience periods of high and low cash flow throughout every calendar year. As a result, seasonality is a huge factor when determining a year-round budget. Every business is different, but there are some universal Do’s and Don’ts when trying to plan your yearly budget.
Seasonal Budgeting: Do’s and Don’t
DO: Prepare for your Business Seasons
For a seasonal business, it is important to budget carefully so that you don’t overspend and run your bank account dry. Taxes, financing, new equipment, and maintenance all occur year round. Just because the flow of customers isn’t as high doesn’t mean you don’t have monthly expenses. When budgeting for your company, you should keep in mind the slow times and put away a little extra during the strong times. By saving more when you’re doing well, the hard times won’t be as financially stressful and you won’t have to make hasty budget cuts.
For some businesses it is actually beneficial to spend more money during the slow periods. If you know you are slower in the winter time, you may want to plan to do any necessary upgrades or replacements during that period so that sales won’t be impacted as much. Capitalizing on slow periods to plan, budget, and expand are some of the smart ways to make the best use of your company’s time. This way, when you are experience strong times and high cash flows, you will have your budgets and plans already in place and all you will need to focus on is sales. Additionally, slow periods may be a good time to send your staff to conferences and shows. This way, they will be able to learn more about the market and network with other professionals experience a lot of the same things.
Of course, if you plan to spend money in the off-season on growth or travel, you need to come up with a solid budgeting plan to put enough money away during the on-season.
DO: Plan for Future Scenarios
It may be hard to plan for “unforeseen circumstances”, but it isn’t hard to plan for any circumstance you can think of. For example, if there is a big power outage during a storm and you lose power for a week. Should you shut your doors and lose the possible profits, or should you go buy a generator so you still have electricity? These are the types of things you should have plans ready to be place for. From there, start with a basic budget to cover your fixed costs and then create some flexible budgets that will allow you to react and respond based on actual outcome, good or bad.
DO: Consider an Alternative Fiscal year
The calendar year isn’t always the best structure for every business. Businesses that experience seasonality have been known to stray from the standard 12 month period starting January 1 and ending December 31. This is known as an alternative fiscal year.
Some businesses that only exist for a few months a year—summer or winter based stores—use a short tax year. With this strategy, the business is only responsible for filing a tax return that encompasses the time they were actually open for business. For any business that stops doing business altogether at any point during a year, filing using a short tax year has its benefits.
If you’re thinking about changing your businesses fiscal year, be sure to do your research into how this affects your filing status. You should also speak with your accountant to make sure you are following all the necessary rules along with the change.
DO: Try to Increase Value
A great way to spend your down time that can possibly lead to a solution for slow periods is to do a customer outreach survey. You can ask your customer email database to fill out a short survey geared towards how you can better serve them. One of the questions might be, “What products would you like to see us selling during the winter” for example, if you’re a primarily summer company. Trying to boost customer satisfaction is always a good way to make customers feel cared about and ultimately helping your bottom line.
You can also use this time to look into new vendors and cost cutting initiatives to possibly increase the markup you make on each sale. This way, you will be able to make more profit and won’t have to raise prices.
DO: Look into Short-Term Debt
Debt is usually a word that people consider to be scary and ominous. However, taking on some short-term debt can have immensely positive impacts on your businesses cash flow during slow periods. Using short-term debt to finance your growth and expansion during a slow period can help you earn even more money during the strong periods.
Harbour Capital works with many seasonal companies across the country. We even have a unique program where we can lower the monthly payment on your loan to a small contact payment for 3 months out of the year. This program allows seasonal companies to have some wiggle room in their cash flows during slow periods by reducing the monthly debt obligation when inflows are tight.
DON’T: Lock Yourself in a Rigid Budget
No matter how long you have been in the business, things change. For this reason, you shouldn’t use the same budget every single year. Even if you know you typically sell 50,000 bathing suits in the summer and 10,000 bathing suits in the winter, it’s important to remember that it might not always be this way. Don’t get caught up using one budget year after year because you could limit your potential earnings if there is a warm winter and demand is higher. Similarly, making your budget flexible to the changing demand is very important. If you have an abnormally warm summer and weather predictions for winter seem to be following suit, change your budget up a little bit to give yourself some wiggle room if demand in the winter is higher than normal.
DON’T: Drastically Cut Prices
Cutting prices to boost demand will only work when there is ample demand to boost. For example, if you decided that you are going to cut prices because you are in a slow period, you need to do your best to make sure the cutting of prices will actually result in higher sales volume. If the demand is simply not there, then cutting prices won’t have any benefit for you and it will only hurt you. Having a good cost-benefit analysis that you can mess around with to figure out breakeven levels is the first step forecasting whether or not cutting prices is a good idea.
DON’T: Drastically Cut Budget
Cutting costs and pinching pennies during slow times is a natural knee-jerk reaction. However, it’s important to think longer term. Hurting relationships with vendors, cutting good employees, and things of this nature could hurt your company when you need to ramp up for your strong periods.
Making the Best of Seasonality
Using previous data and looking at trends from season to season, businesses should be able to map out a rough idea of when business will be booming and when business will be slow. Forecasting methods should be taken by any business, but particularly for businesses that fall into a seasonality trend. Building a year round budget to give your company breathing room during slow periods is crucial to keeping your cash flows in line and making sure your bottom line is always met.