By Steven Cohen

The holiday season can be the most profitable time of the year for retailers and many service-based businesses that offer holiday gift incentives, like day spas and restaurants. During this brief period, small businesses make 20-40% of their annual revenue, according to the National Retail Federation.

With so much at stake, small businesses need to be fully prepared to leverage opportunities for sales, including appropriately stocking up on holiday favorites, increasing staff and using diverse means to reach customers—all of which take money to bring to fruition. And yet, a lack of cash is one of the top reasons why small businesses struggle.

This article looks at how well-managed cash flow will help you prepare for your business’s holiday season cash demands to ensure a successful season.

What Is a Cash Flow Cycle?

A cash flow cycle indicates how and when revenue comes into your business from sales and services, and how and when it goes out from expenses. For many small businesses, managing this cycle well is one of the surest ways to improve your bottom line—and mismanaged cash flow cycles can lead to financial hardship.

Nearly all businesses experience some revenue ups-and-downs. For some, certain times of the year may define when revenues increase and fall and for others, it’s certain times of the month, such as the end of the month when accounts receivable (money owed to you) are still outstanding and new billings or sales have yet to bring in money.

Do You Know How to Manage Your Cash Flow?

To optimize seasonal opportunities, the first step is to ensure that you have cash on-hand to purchase inventory, increase staff, participate in industry-wide or local marketing initiatives, advertise and do whatever else it is that gets customers to your business.

How can you get a read on your business’s cash flow and time financial outlays to optimize operations and profitability?

To understand your cash flow in preparation for the holiday season, existing businesses should look at their financials for the preceding year (or years); if this is your first year in business, you should make your best estimates based on what you know about the industry you’re in.

Here’s how to manage and analyze your business’s cash flow:

  1. Review current cash flow statements (as well as those for this time last year, if relevant). In your current cash flow statement, look for things that can give you a cash infusion, such as collecting on outstanding accounts receivable. In past statements, see if you can spot where money was short and how your business might have done better if you had more cash on-hand.
  2. Review your credit policy for more timely accounts receivable collection. For example, can you change your invoice due-date terms from 30 days to 15 days? Would an early-payment incentive help?
  3. Similarly, review your accounts payable. Be sure to pay on time, but don’t get into a cash crunch by paying early unless your vendors offer terms that make it advantageous. You can control this process more easily by implementing accounts payable automation.
  4. Review your current and planned inventory purchases. Be sure not to tie up too much cash in slow-moving inventory that won’t sell before the holiday season or until winter’s here. By managing your mix of offerings, you can deploy your cash more appropriately.

Prepare for Loans or Lines of Credit Now

While many small business owners don’t like the idea of going into debt, small business loans and lines of credit are essential for growth and success. The trouble comes when business owners don’t figure out their needs and prepare for the application process in advance.

By reviewing your cash flow statements and holiday season sales plans now, you can anticipate how much money you’ll need for a successful season while avoiding predatory loans and other financial pitfalls.

  1. Analyze your business’s financial needs and research loan or line-of-credit options. Your business’s bank is a good starting place, as are Community Development Financial Institutions (CDFIs), which are non-profit, mission-driven organizations that help small businesses.
  2. Contact lenders to find out eligibility criteria and application requirements and gather and organize your paperwork. Also, know that for most seasonally related financial needs, shorter-term loans like lines of credit are typically preferable to longer-term loans.
  3. Be prepared to discuss how you’ll use the funds with your potential lenders. Keep in mind, too, that lenders like to see that you’re not only thinking of how to get through the holiday season, but how a great season will be leveraged for future growth, too.
    1. In addition to things like inventory, include marketing and advertising plans that build your brand.
    2. Don’t forget about essentials like funds to help you ramp up staff in anticipation of your busy season—and even funds to help cover your salary until holiday revenues kick in.
    3. With funding in hand, this is a good time to improve your online presence. Before the holiday season is upon us, consider updating your website and ecommerce platforms. It’s also a good idea to plan your November-through-December digital marketing strategy now and if design assistance is needed, undertake that, too.

Understand Your Cash Flow Cycles to Support a Great Holiday Season

Understanding your cash flow cycle ensures a stronger holiday season, and it’s a great practice to regularly review your cash flow statement, even if you have a bookkeeper or accountant prepare your financials for you. Your business financials can help you stay informed about how your business is operating and enables you to make smarter decisions related to operations and activities, from increasing staffing to financing growth.