Your Slow Season May Be Coming.
Are You Prepared?
Many seasonal businesses work all year only to produce most of their profits in three to five busy months. Other companies, such as construction firms, may have a longer stretch of profitability but find things really slow down in December, January, and early February.
If your business is cyclical, you’ve likely known it for a long time. But how have you prepared in the past? Do you anticipate what’s to come and take steps to ease the pain of lean times?
Here are some ways we have helped our clients hunker down for the winter hibernation:
* Understand your cash flow and how it affects the business after the lean time is over. The income built up during good times often carries a business through lean times. Let’s say it takes 90 days to collect all your receivables and these collections provide three or four months of operating cash to make it through the lean times. Sounds great, right?
But if the business owner isn’t careful, there will be nothing left to “prime the pump” once business picks up again. We all need cash for marketing, new hires, or other needs to restart the growth next year.
*Plan your expenditures carefully, especially those you make during the slow season. Know how much you need to save to have a strong foundation when your work picks back up. Slow times are ideal for tackling projects and buying business assets, but always be mindful of the reserves you’ll need. We once had a client who made most of his equipment purchases in the off-season. While he got great prices, he risked jeopardizing his business by using cash required to ramp back up a few months later.
* Cutting expenses may mean cutting staff. Payroll, taxes and benefits usually make up around 60% of a business’s overall expenditures. That means any decision to cut costs or conserve cash will probably involve staffing. Temporary labor, furloughs, and cross-training crews to work in multiple lines of business are all tactics to consider.
We understand these are tough decisions and employees are counting on their employers. But as business owners, we must weigh how fair it is to run out of money and miss a payroll versus making a few employees inactive during slow times.
* Retire debt ahead of time. Most businesses have a line of credit to cover temporary cash needs or help even out fluctuations in payables and receivables. Often these credit lines require a business to maintain a zero balance for 30 days every year. Take advantage of good times to ensure this loan requirement is met and that the bank doesn’t call to enforce it when the business is least prepared to handle such a request.
It also may be a good idea to seek an increase in the credit line if the business has been successful over the past couple of years. If you would like to explore your options, Lucrum can certainly assist.
Some seasonal business owners head into the winter aiming low, trying to do little more than make it through. But with the right preparation and strategy, quiet times can be highly productive, nourishing your business and becoming a source of future growth. We’ll give more tips in next month’s Lucrum Letter on how to make the most of lean times.