The Ultimate Guide to How to Manage Cash Flow


Keeping cash flow in check is a challenge for every business owner and their business finances. In fact, challenges around how to manage cash flow represent the number one reason that small businesses fail—including businesses that are on track for long-term profitability.

No matter how successful your business is on paper, if you don’t have the necessary cash on hand when rent or payroll is due or when you need to make your next inventory order, your business can’t survive.

For businesses whose revenue streams face strong seasonal ups and downs, however, this challenge is an altogether more difficult one to address. It requires extreme diligence, preparedness, and an awareness that things won’t always go according to plan.

Seasonal business owners carry the responsibility to be far more organized and disciplined than their peers in order to account today for challenges and opportunities that may arise as much as eight to 12 months down the road. That’s just not an issue that year-round business owners typically have to deal with.

There is some good news to this challenge, however. Seasonal business owners who master how to manage cash flow under these difficult circumstances are poised to build some of the most financially healthy businesses around.

What Is Cash Flow?

If you’re a business owner you probably know what cash flow is, but new business owners may have only heard the term tossed around but aren’t really clear on what it means or how to manage cash flow.

Luckily, it’s very similar to what it sounds like. Cash flow usually refers to the flow of money in and out of your business at a specific time. Generally, you’d have to identify a time period during which you’re examining the cash flow, like week to week or month to month. You can calculate your business’s cash flow by using a formula.

What Does Cash Flow Positive Mean?

If your business is cash flow positive, that means you’ve got more money coming into the business than you’re spending in a given time frame, which is good! Cash flow negative is the opposite of this.

But given that the money coming in and the expenses of a business can fluctuate throughout the year, being cash flow positive doesn’t necessarily always equate to profitability. Your business’s profitability is the money left over after all of the expenses are paid for and usually this is calculated at the end of the year.

After taking a look at all of your expenses and the money coming into your business you may be wondering how to manage cash flow. We’re going to go over tips for how to manage cash flow for your business below so you can feel confident in your business.

Evaluate Your Cash Flow Needs

The key to financial success for any small business starts with an in-depth analysis of your cash flow situation then you can devise a plan for how to manage cash flow. Until you fully understand how and when money flows into and out of your business throughout the year, any steps you take toward better cash flow management are ultimately just a guessing game.

Before anything else, properly managing your cash flow should start with putting together two key financial documents: your statement of cash flow and your expense forecast statement.

Tip #1: Preparing Your Statement of Cash Flow

Unlike your business accounting balance sheet or profit and loss statement—each of which only represent a given point in time—a cash flow statement shows how and when money flows into and out of your business over a longer period.

If you’ve never prepared a cash flow statement for your business before, it’s a good idea to review past income and expenses over the course of at least an entire year—and ideally for the past two to three years whenever possible.

Some accounting software programs offer cash flow statement among their reporting options, or you can use a ready-made cash flow analysis template to generate your own cash flow statement.

Preparing your business’s first cash flow statement can be a time-intensive process, so it’s a great chore to take care of during your business’s offseason if there is one. But once you’ve done the work to create this document for the first time, it will be easy to maintain in the future—and the knowledge you gain can make the difference between success and failure for your seasonal business.

Tip #2: Forecasting Any Seasonal Business Expenses

Once you have a detailed record in hand of your business’s cash flow ups and downs from years past, you’ll be much better equipped to forecast the expenses that are likely to arise over the course of your next offseason.

In many ways, your expense forecast statement will look very similar to your cash flow statement. The main difference? Your statement of cash flow is an analysis of past transactions, whereas a cash flow forecast is by definition an educated guess about what you can expect from your cash flow needs in the future.

As you create your expense forecast, pay special attention to any pre-season expenses that will arise just before your busy season starts (if you have one,) such as inventory purchases or early staffing requirements.

This is often the time that a seasonal business’s expenses are highest, and because it’s the time farthest out from your last high season, it might also be the point when cash flow reserves have hit their limit. Anticipating and setting aside separate funds for these preseason expenses will help you avoid running out of capital in those last weeks before sales volumes rise again.

Plan Ahead for Unexpected Costs

Regardless of seasonality, unexpected expenses are a reality of business ownership. The leaky roof of your storefront. The damaged batch of inventory that needs to be replaced. The project that takes far longer than expected, forcing you to pay overtime for personnel to get things just right. These factors are a reality of doing business, and seasonal business owners, in particular, don’t have the luxury of pretending that these unanticipated costs won’t come up.

A year-round business owner might have the option of quickly expanding a product or service to make up for lost profits. But when a seasonal business owner faces a large expense during the offseason, it can take months to recoup that cost through earned income. That means you have to go above and beyond in planning ahead so that when the unexpected happens, you’re not left scrambling to figure out what to do.

Here are three ways that you can anticipate the unexpected within your cash-flow-management plan:

Tip #3: Establish an Emergency Fund

Planning for the unexpected as a business owner starts with an earmarked emergency fund. This is one of the most important approaches to how to manage cash flow. At minimum you should set aside one month of average business expenses—and many cash management experts recommend working toward a three-month emergency fund.

Of course, establishing and maintaining an emergency fund sounds like simple advice, but it requires discipline. To keep yourself accountable and avoid dipping into this cash for every seemingly must-have opportunity that comes along, consider writing strict standards for yourself about what constitutes an emergency worthy of depleting this separate fund.

Tip #4: Include Contingencies in Your Budget

Entrepreneurs are notoriously optimistic bunch. In many ways this is good news, as it allows seasonal small business owners to endure the ups and downs of day to day operations without becoming overly discouraged. That said, this natural optimism can also lead small business owners to consistently underestimate future expenses while overestimating future sales volumes.

That’s why, upon completing your business’s expense forecast, it’s a good idea to add in a contingency category equivalent to 20% to 30% of your total expenses. Whereas your emergency fund is designed for large and one time unexpected costs, this contingency budget will account for the nicks and cuts of small expense increases caused by inflation, increased shipping costs, or price changes on certain goods.

Ideally, you’ll able to prepare be truly accurate off-season expense forecast in the first place—but there’s no harm in leaving yourself a margin of error. In the event that your contingency fund goes unused, it can let you take advantage of last-minute growth opportunities or even be distributed as additional profits.

Tip #5: Secure a Line of Credit to Avoid Disasters

Even with a contingency budget and a hefty emergency fund in place, there’s still room for the truly unexpected to de-rail your business’s cash flow. What would you do if your retail space was impacted by a flood or a fire during the off season and insurance didn’t cover the full expenses? What if you suddenly had to replace a major piece of equipment that you use from year to year?

Many small business owners would seek a short-term cash flow loan in this instance, but these so-called emergency loans come with exorbitant interest rates. This is particularly troublesome for seasonal business owners, since a cash flow emergency early in the off-season could leave you accruing this expensive interest for a long while before you can bring in enough revenue to make full repayment.

For this reason, accounting professionals often recommending that seasonal small business owners maintain an open business line of credit. With this credit model, you can take your time to shop around for a low-interest business line of credit. You want one with excellent terms at the beginning of your offseason, giving you the peace of mind that funds are available when you need them without your having to pay a cent unless you actually use the funds in question.

As long as you never draw upon your line of credit, no costs are associated with having the funding available—so there is truly no downside to keeping this option in your back pocket. Remember, though, that the right time to apply for a business line of credit is before you need the funds—so go ahead and check this off your off-season to-do list as soon as you can.

Offset Revenue and Expenses in the Off-Season

You’ve done the homework to better prepare for strong year-round cash flow management and even made contingency plans for the unexpected. But what can you do to actually minimize those cash flow ups and downs?

Let’s look at a few ways you can make the most of your seasonal business model in order to maximize your annual profits:

Tip #6: Think Twice About Unnecessary Year-Round Expenses

When year-round business owners sign a lease or hire employees, they face far less concern about spending thousands on retail spaces that sit empty or payroll for employees who don’t actually have much work to do. As a seasonal business owner, however, this challenge must factor into every expense decision you make.

If you’ve operated a seasonal business for a while, you’ve likely already addressed this concern as it relates to employees or your physical space. You’re used to hiring part-time employees for only the high season of your business, making it clear that there’s an end date to the work period when your busy season ends. You may even have found ways to sublease office or retail space during the slower months.

But what about smaller day to day expenses—things like your utilities or even software subscriptions for tools that you only really use during the peak season? Those $10 to $100 per month expenses may not seem like much in the grand scheme of your business, but they add up over time.

Conduct a thorough audit of your business’s year-round expenses, and look for small ways to reduce costs that could add up to a big difference. And if you do have more year-round employees or more office or retail space commitments than you need, it might be time for some hard conversations in order to reduce those off-season costs.

Tip #7: Use Downtime as Opportunity for Savings

While the extreme ups and downs of running a seasonal business may present as a challenge that has to be overcome, there are actually some potential upsides to your seasonal business model—if you learn to use those to your advantage.

Are you making the most of the time available to you in the offseason?

With self-discipline and a little bootstrapping, you can benefit from unique opportunities to DIY aspects of your business during those slower months that you might otherwise have to outsource for a hefty fee. Take a graphic design or online marketing course, then use that off-season downtime to design your own marketing assets and put together a promotional plan for your business.

This is also a great time to shop around for lower-cost suppliers or to save on shipping or other costs by ordering materials or inventory that you need well in advance.

Tip #8: Diversify Your Business for Off-Season Income

Planning ahead and minimizing expenses can go a long way toward better managing cash flow for your seasonal business—but at a certain point, there is simply no replacement for having multiple streams of revenue. How could you diversify your products or services in order to balance out income between high and low seasons?

For a hospitality business in a seasonal tourist location, that could mean doubling as a conference or retreat center during the slower months. If you have a seasonal service business, think about complimentary services for which there may be more demand during slower months of the year.

And remember, your secondary income stream doesn’t necessarily have to be directly related to your core business and brand. Launching a subsidiary or even an entirely separate second business could allow you to make use of the same team, skill sets, and resources in a completely different way.

There’s no denying that when it comes to cash management, seasonal small business owners have a unique set of challenges to contend with. But if you can do the work during your offseason to conduct a thorough cash flow analysis and forecast, line up your savings and contingency financing options, and look for ways to balance out off-season revenue and expenses, you have the potential to build a business poised for long-term growth and sustainability.

Keep Your Cash Flow Management in Order

Once you’ve gone through all the different ways to boost your cash flow and secure it, you want to make sure you’re keeping track of it as well as possible too. There are a few ways that you can do this.

Tip #9: Have Someone Monitor and Manage Cash Flow

It might be easiest for you to have someone else in your business manage your cash flow and keep track of it. A trustworthy employee who might be more involved in the day-to-day business activities might be in a better position to manage your business cash flow. If you don’t have an employee you trust to manage it, consider setting aside a specific time each week to go through it to keep yourself up to date and aware of your cash flow situation.

Tip #10: Keep Up With Cash Flow Tracking, Maybe in a Spreadsheet

Whether you manage your cash flow or assign an employee to do it for you, you might find that a spreadsheet is the best way to track it. Keep those files in a cloud drive where you can easily access it online so even if you aren’t at your business, you can keep up with your cash flow management. Make expenses scheduled if you can so you know what day to input it, or maybe even the exact cost to expect. If you can access your tracking sheet from anywhere, you can enter expenses right as you make them.

How to Manage Cash Flow: The Ultimate Guide

Now that we’ve gone over all of the aspects of how to manage cash flow, you should be able to take some of these tips and put them into play for your business.

From planning to tracking we’ve got you covered with the dos and don’ts of how to manage cash flow. Remember, cash flow and profit are different, and even if you go negative with your cash flow, there’s still time for your business to bounce back and end up turning a profit.

Meredith Wood
Editor-at-Large at JustBusiness

Meredith Wood

Meredith Wood is a small business owner, the editor-at-large at JustBusiness, and VP at Fundera.

Meredith is the founding editor of Fundera and has specialized in financial advice for small business owners for close to a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and has contributed to or been featured in the SBA, SCORE, Yahoo!, Amex OPEN Forum, Fox Business, Fortune, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, Manhattan Chamber of Commerce and more.

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