Managing the Cash Flow Hills & Valleys

Some businesses have a steady stream of revenue throughout the year.? Many, however, have a busy season and a slow season separated by periods of cash flow uncertainty---this makes cash flow planning so much more difficult.? Once we add a layer of unexpected business opportunities and expenses on top of all of that, we see the full challenge of cash flow planning.

Here are some strategies that small business owners can use to navigate these important cash flow issues.

Seasonality

Prior years’ sales can help predict upcoming volume.? Budget your revenue just as you budget your expenses.? Once you’ve established monthly cash inflow and outflow budgets, you can see the projected size of your surpluses during your busy period and your deficits when things are slow.

Developing Strategies for Your Slow Periods

Get together with your co-owners, staff, and any advisors and address the following questions:

·????? How can we generate additional revenue during the off-season?? Are there complimentary business activities to which we can pivot?? A great example of this is a landscaping company that plows snow in the winter and professionally decorates houses during the holiday season.

·????? Can we lower expenses?? What non-essential expenses can be cut when revenue is down?? Can staffing and overhead be reduced in some way?

·????? Can we slow payments to vendors and/or speed-up receivables? ?Many business owners do not strategically communicate with their customers and vendors from a financial perspective.? Perhaps you can offer a discount or some other incentive for quick payments from customers?? Similarly, you can ask your vendors to give you longer payment terms.

·????? Can we draw from a business savings account or pull from a credit line?? If you currently do not have either, it may be easier to become qualified for a credit line than slowly build up savings.

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Developing Strategies for Your Busy Periods

Have the same group help you with these different questions that relate to busy periods:

• Can we save cash or pay down credit lines?? Busy periods are the time of year during which you prepare for the slow periods.? So set aside funds or pay down that credit line.
• Can we pay down or prepay certain expenses and if we do so, will we receive significant discounts?
• Are we being careful with expenses? Purse strings tend to loosen when cash is flowing, but don’t let them loosen too much.? Just be careful not to scrimp on any expense that contributes to sales.? For example, cutting back sales staff during a busy period may very well lead to reduced revenue.

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Unexpected Expenses and Opportunities

While utilizing business savings to cover unexpected expenses/opportunities is certainly an option, very few small businesses have either the time or resources to do so. ?As a result, qualifying for a credit line may be a more practical approach.

I represent a number of credit line providers and while they all have different underwriting criteria, they tend to focus on the following:

·????? Bank Statements- They’ll want to determine your true deposits net of transfers and will pay close attention to your average daily balance.? In addition, multiple negative balance days or NSF checks will likely hurt your application.

·????? FICO Scores- Most credit line providers will want to see at least a 650 FICO.

·????? Other Obligations- If you already have a number of Merchant Cash Advances (MCAs) reflected on your bank statements, you will likely be declined by the lender.??? One MCA shouldn’t hurt, but some lenders will have a problem with two, so be careful with your number of open MCA positions.

·????? Financials- Some credit line lenders will ask for last year’s financial statements as well as year-to-date.?? While each lender may review the documents differently, typically they want to see that you’re profitable and not over-extended with debt.

The bottom line with cash flow planning is to focus equally on periods of surplus and deficits so that you can enjoy the view from the hills and survive your time in the valleys.

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