Many
businesses operate with seasonal peaks and valleys. Retail stores just completed their busy holiday season. Construction contractors are busy when
the weather is good.
Accountants are very busy from January through April, but also
experience a quarterly peak in July and October.
Your
business many have its own calendar of busy and slow times. If your business goes through slow
times, then your cash flow may suffer at certain times of the year. But having seasonal sales is only one
of the reasons for a bumpy cash flow.
You might
also have a business where annual payments are made for many items such as
equipment purchases, software licenses, insurance renewals, and other large
costs. On the revenue side, it
could be that your clients pay you annually, which can be hard to predict.
There are
many solutions that can help to smooth out the seasonal bumps, and here are a few
ideas for your consideration.
Plan for Prosperity
When
income and expenses go up and down and up and down, it’s really hard to know if
you have enough money for obligations coming up. Creating a budget can help a great deal. Consider creating two budgets: one that shows the ups and downs and
one that averages a year’s income and expenses into twelve equal parts.
With both
budgets, you’ll be able to see which months will be deviating from average and
by how much. From there, it’s easy
to create some forecasts so you can stay on top of your cash requirements.
Cash vs. Accrual Basis
It might
help your business decision-making to convert your books from cash basis to
accrual basis. This is a huge
decision that should be made with an accounting and tax expert, as there are
plenty of ramifications to discuss.
In some
cases, the accrual basis of accounting will help keep those annual payments
from sneaking up on you as 1/12 of the payment can be accrued on a monthly
basis to a payables account. This
also keeps your net income figure steadier from month to month.
If your
clients prepay their accounts on a yearly basis, you can book the income
monthly and keep the difference in a Prepaid account. This spreads your revenues out and recognizes them over
time.
“Hiding” Money
If you
feel accrual basis accounting is a little too much of a commitment, your
accountant can still work with you to help you avoid the impulse of spending
too much during the cash-rich busy season. Perhaps the excess cash can be put into a savings account
until it’s needed. You can draw
out 1/12 each month as you need it.
A little planning such as the above suggested forecasts will help you
determine how much you can take out each month. You can even name the Savings account “Do Not Spend!”
or “Save for a Rainy Day.”
If it’s
just too tempting to have all that excess cash building up in the good times of
the year, try one of the ideas above to take back cash flow control and smooth
out those bumps.
