The Small Business Owner’s Guide to Seasonal Budgeting

Ebbs and flows are a natural part of running a small business, and it’s not uncommon for your sales cycle to peak at certain times of the year. When those seasonal highs and lows occur largely depends on what type of business you have.

The key to successfully navigating seasonal ups and downs is fine-tuning your budget so there are no surprises. If you do find yourself running short on funds, small business financing can help you to bridge temporary budget gaps. After reading this guide, you’ll understand:

• What’s needed to create a budget for your business’s slower periods
• How to adjust your budget for seasonal upswings
• What kind of small business financing is best for managing seasonal bumps

Let’s get started by looking at what you need to factor in when mapping out your initial seasonal budget.

Seasonal Budgeting 101: Planning for Down Time

First things first, you’ll want to start by creating a list of your baseline costs. These are the minimum expenses required to keep the doors of your business open from month-to-month, and may include:

• Monthly lease or rent payments
• Vehicle lease payments
• Utilities (Electricity, Internet service, cellular service, etc.)
• Taxes
• Insurance
• Accountant fees
• Inventory and supplies
• Marketing and advertising
• Payroll if you have employees
• Loan or business credit card payments

If you’ve been keeping up with your financial statements — income statement and balance sheet — you probably already have a good idea of what these operational expenditures are costing you. These documents, along with your budget, can allow you to gauge the financial health of your business. If you haven’t been maintaining these records, now’s a good time to get started.

It’s possible that some of these expenses may be higher at certain times of the year than others. For example, your electric bill is most likely higher during the summer months if you rely on AC to keep your business cool. A helpful way to account for these fluctuations is to add up what you pay over the course of a year, and then divide it by 12 to get a monthly average.

The same rule applies if you have irregular expenses that are paid annually, biannually or quarterly. For example, if you own a couple of delivery vans for your florist shop, you’d have to add in annual property tax payments. A sound way to budget for irregular expenses is to average out what you need to set aside each month to cover them so that when the bill is due, you’re not scrambling to come up with the money.

Streamline Your Spending

Once you have an idea of what you need — at a minimum — to keep your business running smoothly during the off-season, you can take a closer look to see if there are any costs you can reduce.

If your clothing boutique is coming off the end of the holiday rush, for instance, you may be ready to scale back on marketing for a few months, or reduce hours for your staff. If you own a beach shop that stays open all year but sees its highest sales during the summer months, you may not need to order as much inventory once Labor Day rolls around.

One thing you don’t want to do is make any drastic budget cuts without considering the implications on your business. While it’s good to minimize your expenditures when your business isn’t generating as much revenue, you need to be strategic about trimming the fat.

For example, let’s say you run a retail store and you’ve been planning to do some remodeling. The off-season could be a prime time to get it done if foot traffic is a little lighter. Not only that, but a new layout could help to spur sales once things pick back up. You’re worried about the cost, however, so you decide to wait on pulling the trigger.

In that scenario, putting your plans on hold could allow you to preserve your cash in the short-term. The downside is that there’s a chance it could hurt your business in the long run if it means missing out on an opportunity to increase your revenue, in which case, a small business loan could be the the solution for covering those upfront costs.

Budgeting for the Busy Season

The other side of the seasonal budgeting coin means making adjustments to compensate for those times when business is booming. This is something you want to tackle well before sales start to climb.

So what does that involve? It simply means looking at your existing budget and making allowances for what you’ll need to get your business ready for the season and what you’ll be spending more on in the coming months.

As far as getting geared up for the season goes, the kinds of things you’ll need to account for could include:

• Hiring and training new employees
• Launching a new marketing campaign
• Stocking up the shelves of your retail store
• Purchasing specialty ingredients for your restaurant’s seasonal menu
• Upgrading your point-of-sale system
• Purchasing supplies for your photography business
• Replacing or repairing a key piece of equipment
• Outfitting your bookstore with seasonal decorations

What’s on the list ultimately depends on the kind of business you’re running. Once the season starts, your list may expand to include:

• Holiday bonuses or gifts for employees
• Gifts for vendors or clients
• Costs associated with hosting a seasonal sales event
• Ongoing marketing expenses
• Added payroll costs for seasonal employees
• Postage and shipping if you’re mailing out orders to customers
• Increased transportation costs

Although it isn’t technically an expense, you need to be cognizant of  how running special promotions or offering seasonal discounts impacts your bottom line. The same goes for post-holiday shopping returns. According to the National Retail Federation, 10% of all holiday merchandise is returned, with one out of three gift recipients returning at least one item in 2015. Both of those affect your business’s cash flow and profitability, so it’s essential that you factor these costs in.

Coping With Seasonal Budgeting Challenges

All of the scenarios mentioned earlier assume one thing — that you have enough cash to pay for your basic expenses, as well as any increase in costs that emerge during the season. That’s not always the reality, however, when you run a seasonal business. Luckily, small business financing can help. The question is, which type of financing is best for managing seasonal budgeting challenges?

1. Term loans

A term loan is similar to a mortgage or a car loan. You borrow a certain amount of money for your business, and you agree to pay it back over a set period of time. The lender charges you interest and the loan may come with a variable or fixed annual percentage rate.

The repayment term varies based on whether you choose a short- or long-term loan. A short-term loan may have a repayment term of 18 months or less. A long-term loan, on the other hand, may allow you up to five years to pay it off. Bond Street’s intermediate loan falls in the middle, with terms ranging from one to three years.

You can use a term loan to finance just about anything for a seasonal business but they’re especially suited to making long-term investments, like a major equipment purchase. Depending on the lender, you may be able to borrow up to $1 million with a term loan.

2. Working capital loans

Working capital loans are designed to help you maintain cash flow over shorter periods of time. For instance, if you own a coffee shop and your sales decline in the summer months you could use a working capital loan to meet payroll until the cooler fall weather sends customers swarming your way.

One thing to keep in mind is that working capital loans typically have to be repaid within a shorter time frame. That may not be a problem if you’re counting on higher revenues in the near future but if you need a significant amount of capital, a term loan with a longer repayment period could be more budget-friendly.

3. Merchant cash advance

If your business accepts credit and debit cards, a merchant cash advance may be appealing. This type of financing allows you to borrow against your future credit and debit card receipts. You then commit a percentage of your daily credit and debit sales to repayment.

The good thing about merchant cash advances is that you don’t need a lengthy operating history or a perfect credit score to qualify. It’s possible to get financing if you’ve been in business for as little six months as long as you’ve got the requisite credit and debit card sales. By comparison, most term loan lenders require a good credit score and at least one year of operating history to qualify.

The other drawback to keep in mind is the annual percentage rate associated with a merchant cash advance. This type of financing uses a factor rate to determine how much you pay in interest and the cost can go well beyond what you’d pay for a working capital or term loan.

4. Invoice financing

Invoice financing has a lot of similarities to a merchant cash advance. Instead of your credit and debit card sales, you’re borrowing against the value of your business’s outstanding invoices. Invoice financing also determines the interest charges using a factor rate, making them a more expensive financing option.

Another thing to consider is the repayment term. Both merchant cash advances and invoice financing usually require full repayment within a few months. If your seasonal sales end up falling short of your projections, that could make repaying either type of loan on time more difficult (and stressful).

Pick the Financing Option That Works Best With Your Seasonal Budget

These four financing options offer different paths for seasonal budgeting. They all rate well for speed and convenience, and each can put a generous amount of capital in your hands when you need it. However, we still highly recommend you do your homework to narrow the field.

Specifically, think about which one is going to be the most workable with your budget. If you’re considering a term loan, can you make the same payment each month without any hiccups? Would a merchant cash advance be better if your credit and debit card sales aren’t always consistent, and you need to adjust what you pay monthly? Asking those types of questions can point you towards the best solution for your seasonal budgeting needs.