Have you noticed unexpected seasonal variances in your company’s cash flow? If your business is seasonally-based (a lawn care or snow removal company, for example), it’s normal for your cash flow to vary depending on the time of year. Unfortunately, many companies who shouldn’t be affected by the seasons still experience peaks and valleys in their cash flow. Let’s take a look at why this might be happening, and what you can do to adjust your forecasting based on previous years’ behaviour. (And if you’re struggling with cash flow gaps that aren’t seasonally-based, we can help solve those issues, too.)
Why your business may experience seasonal variances in cash flow
The two most common times of year that you’ll likely experience an unexpected dip in your cash flow are during July and August, and during the last two weeks of December. When it comes to the summer months, collecting timely payments from your clients can be challenging. While most clients typically pay in two- to four-week cycles, sometimes this quickly stretches to as many as eight weeks because clients go on vacation and don’t notice that their invoice deadline has passed. The Christmas holiday season can often cause this cash flow discrepancy as well because some businesses close their offices for one to two weeks, thus sometimes pushing their payments accordingly.
In most cases, these are strong, reliable clients that you don’t want to lose, but if this is a recurring issue, you need to make sure that your business doesn’t suffer as a result. If the work you’re doing and the work you’re billing for hasn’t changed, then a seasonal variance shouldn’t exist on your end. So now that you know why these dips might be happening, how can you adjust your forecasting and counteract your cash flow gaps?
How to adjust your cash flow forecasting and counteract your gaps
First, you need to examine your sales cycle and your cash flow patterns. Start by taking a look at your bank balance from the previous year and analyze where and why you have dips, and then work to determine how you can minimize their effects in the future. Here are our top solutions to counteract your cash flow gaps:
Reserve extra funds throughout the year to cover cash flow dips: We admit that this is hard to do, but it’s a very effective strategy. By allocating a portion of your profits during other parts of the year to cover for the dips, you’ll be prepared ahead of time.
Proactively manage invoice dating and collection: If you know certain clients are always late on their payments during specific times of year, check in with them before they head on vacation to ensure that they’re paid up ahead of time.
Reduce expenses during lower cash flow months: Where possible, try to cut down on any unnecessary expenses during these months to help keep your cash flow positive.
Arrange a line of credit or try receivables financing: Consider investigating new lending solutions that can allow you to get the money you need to bridge your cash flow gap.
Do you know the difference between a sales plan and a business development plan? We’ll break it down for you – and teach you why they’re both important – in our next blog post.