Many businesses operate with seasonal peaks and valleys. Retail stores just completed their busy holiday season. Landscapers are at their slowest time of year (unless they live where there’s lots of snow). 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.
Not sure how to create budgets in QuickBooks? Here’s an article that may help.
Cash vs. Accrual Basis
QuickBooks gives you two ways to view most of your reports – Cash or Accrual. I usually recommend having accrual be your default setting and then switching to cash (from the customize/modify report menu) when viewing some reports. Of course I’m assuming you enter bills (rather than simply write checks) and invoice your clientele. Unless everything is due on receipt, this can also give you a glimpse of what your next couple of weeks or month may look like.
If you have annual payment (e.g. an insurance premium), 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, rather than booking the entire amount in on month, you can set part of it aside in a Customer Prepayment/Deposit account and gradually draw the amount down whether you invoice them monthly for a service or as a phase to a job or project ends. This not only spreads your income out, it also provides a way to monitor what you have set aside for future work. Our article on prepayments may help you with the logistics.
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.