From tourism to weather to the holiday shopping season, many small businesses encounter some degree of seasonality within their business. In fact, according to a recentWells Fargo/Gallup survey, almost half of small business owners reported having predictable times of the year that are significantly busier or slower than others. What’s more, 41 percent said that these seasonable differences make it more difficult to manage cash flow throughout the year. Often, when businesses experience large swings in their revenues, cash flow can be at risk of being mismanaged.
Depending on the industry and type of business, there are many strategies that business owners can implement to cope with seasonal downturns and maintain a positive cash flow. While different strategies work for different businesses, there’s one thing that allbusinesses will benefit from -- maintaining a cash flow forecast. A cash flow forecast will keep track of the inflow and outflow of cash so a business can predict how much money they’ll have on hand month-by-month for the next year.
Here are four things to consider as you manage your cash flow forecast:
1. Know your peak season
If you have a seasonal business, the first step to creating an accurate cash flow forecast is to identify your busy and slow seasons. It’s important to be realistic with your forecasts, so make sure you don’t overestimate peak season revenue or underestimate off-season expenses. If you have an established business, the best place to start is looking at historical sales data and isolating the months with higher revenues and lower expenses, and vice versa. For startup or newer businesses, you may need to rely on competitive research to project your sales.
2. Account for recurring variable expenses
Fixed expenses, such as rent and utilities, are fairly easy to remember and include in your cash flow forecast, but variable expenses aren’t always top of mind. From quarterly tax payments, to annual insurance premiums and months with three pay periods, there are a handful of important variable expenses that must be incorporated in your forecast. Planning for these costs in advance will only help you in the long-term.
3. Consider a business line of credit
Despite your best efforts to maintain a detailed cash flow forecast, there may be times when you need to make a large purchase, encounter an unexpected expense or your business simply didn’t bring in as much revenue as anticipated. These unforeseen costs can be particularly challenging for seasonal businesses to shoulder during the slow season. Having a business line of credit in place can help your business bridge the gap in times like these. Through a line of credit you can access capital when you need it, usually at a lower interest rate than a credit card would offer. Work with your banker to determine your financial needs and understand if a line of credit is a good option for your business -- before you need it.
4. Proactively refine your forecasts
To keep your cash flow forecast accurate and on track, create a rolling 12-month spreadsheet plan and commit to updating it at the end of each month. Plan to add a new month to the end every time a month is completed so you’ll always have a complete picture of your business’s financial health. By updating forecasts regularly, business owners can anticipate cash shortages and take advantage of higher revenue periods when there is extra cash on hand.
As we approach the holiday shopping season and move into the new year, it’s a good time to take a step back and make sure your cash flow forecast is up to date. By knowing how much money is coming in and going out of your business each month, you’ll be in a better position to maintain control over your business’s cash flow. It’s one of the most important things you can do for your small business.
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This article originally appeared on Entrepreneur.com. Minor edits have been done by the Entrepreneur.com.ph editors