Seasonality is a common experience many businesses face when they’re building out their budget. There are obvious examples in the form of tanning salons and ice cream shops to tax firms and event space venues, but even a digital agency or SaaS startup can experience high and low points in cash flow throughout the year.
Here’s a few tips on how your business can plan for seasonal slumps and take advantage when business is booming.
Forget about “feast or famine” with these budget tips for seasonal businesses
1. Establish your bare necessities
First things first, you need to determine the minimal requirements it takes for your business to exist. This means calculating your monthly recurring fixed expenses as well as any variable costs you can anticipate so you’ll know the exact value of the costs you’ll need to cover each month. A few examples are your rent, payroll, insurance, taxes, and loan payments.
Be sure to also include expenses that occur each month but fluctuate due to activity. These are known as variable or semi-variable costs and will include a wider set of costs at a seasonal business. These costs—such as inventory, payroll, and utilities—will go up and down more dramatically as your business works to meet fluctuating demand.
2. Plan holistically for the entire year
For businesses that aren’t seasonal, budgeting means determining an estimated monthly income and deciding how to spend it wisely. But seasonal businesses don’t experience month over month periodicity or repetitive patterns in cash flow—it’s more accurate to look at year over year. Instead of estimating September’s income from August’s, it will makes more sense to look back at September’s performance last year and anticipate the same activities.
This is true for your income, but also for planning to cover the expenses that will be due each month. This becomes easier to plan for when you budget for an entire year at once. You’ll also be more responsible when bigger sums of money come in during busy season and more comfortable making purchases when sales are slow.
3. Stick to your budget during busy season
When your sales are in full swing, it can really feel like you’re on top of the world. If that peak is better than you anticipated, it can blind you from reality that is the rest of the year, but don’t let this derail you from your plan!
Think like a saver and keep your spending to what you’ve already budgeted for. This will give you extra cushion during a slower time or give you time to research the wisest way to spend it in the long run.
4. Be disciplined with cash management
In her small business segment in USA Today, Rhonda Abrams emphasizes how important it is to manage your cash:
“This takes discipline! During the high season, set aside a certain percentage of sales in a reserve account. Get to know your banker, and establish a line-of-credit. You've got to be able to pay your bills when the snow melts or the tourists leave.”
Here she mentions establishing a line of credit. Short term debt is worth keeping in mind when cash isn’t readily on hand. This way you will always have enough cash to keep yourself afloat during slow periods. Be sure to pay it back once your cash flow picks back up! Interest on these financing options can grow quickly.
5. Diligently track everything
Creating a realistic budget is only possible when you have total awareness of your spending. I’ve heard our accountants at inDinero harp on this time and again: “Businesses who fail to carefully capture each and every one of their costs, are destined to be under budget.”
Disregarding spending as a one-time casual purchase and not worth noting, only leaves you unprepared to cover that cost when it comes up again. Without a healthy awareness of your income and expenses, your business is more mysterious than it has to be. You can manage this yourself using tools like QuickBooks or Excel, or make it easy and hire a bookkeeper or outsourced accounting provider that will do it for you. (It’s easier than you might think!)
6. Be rational during your slow season
When I say rational, what I mean is: Don’t let a slow sales period stop you from growing your business. More cautious business owners may be tempted to make hasty budget cuts. But while, you should keep any frivolous costs to a minimum, you shouldn’t be afraid to take on opportunities and spend in ways that will grow your business.
Maintaining a business is a year-round process and in many cases, the more you spend during your off season to prepare, the more revenue you’ll be able to generate during busier times.
7. Build flexibility into your budget
The best budgets for any business have built-in scenarios. This can be especially helpful when planning for seasonality. A flexible budget is actually composed of three different budgets. One budget is your baseline (we touched on this in #1 above), the other two focus on the best and worst case scenarios your business might experience.
This way you can plan ahead while leaving yourself room to react to what actually happens. You’ll make one for the best possible outcome that allows for spending to meet increasing demand and take on new exciting things. The other will be for the rainy day outcome when you’re underperforming on expectations and need to make cutbacks. This way you always have a reliable plan to guide you.
8. Consider an alternative fiscal year
Seasonality is one of the primary reasons businesses trade the standard year (12-month period starting January 1 and ending December 31) for an alternative fiscal year or short tax year. When your business sees an annual influx of income during a certain season or even after a special event, an alternative fiscal year can make tax planning, preparation, and filing much smoother.
Some businesses—mostly holiday retailers and organizations that go out of business—opt to file with a short tax year because they only exist for a few months out of the standard year. Under this option, the business files their taxes only for the time period they were open for business.
Learn more about fiscal and short years and which forms to file here.
Remember: A budget is only useful when it’s realistic
Building a budget whether it be for yourself or your business takes honesty and reflection. While you might look back and regret some of the spending choices you made, those are important moments to take in. If you’re an optimistic business owner you may also experience times of denial. You might mistakenly make excuses for poor performance when there’s really a seasonal shift you should be paying attention to.
Performing a comprehensive financial evaluation is an unassailable way to set proper expectations and build seasonal survival strategy into your year-round budget.