There is a widespread myth that half of the companies fail in its first year of activity. The truth, according to the Small Business Administration, is that half reaches the five-year period and the more a company’s doors remain open, the less they are likely to close.
But another myth persists: seasonal companies suffer above all. The SBA data do not confirm this, showing that companies in different sectors tend to follow similar models in terms of failure. Manufacturing companies, for example, are no longer protected from bankruptcies compared to seasonal companies such as restaurants and retail stores, which means that other factors determine the likelihood of long-term business success.
However, this does not mean that there are no real risks inherent in seasonal companies. A study by Ohio State University indicated that 60% of restaurants do not exceed the first year. Another 2005 study modified this, stating that the 60 percent figure applied to the first three years. The probable reason? Restaurants find it difficult to get initial loans from banks, which puts these companies in a vicious circle: they run a big danger without adequate resources, but they cannot get loans because they are considered too risky.
This is what seasonal companies struggling for sustainability must take into account.
The Money That Arrives Must Last For The Whole Year
Like teachers’ salaries, seasonal companies suffering from peaks and valleys must share their income for a whole year. A gardening activity full of money during the spring and summer months must weigh against the relatively sterile fall and the winter months.
Kabbage, an online loan platform, suggests two ways to do it: diversifying the income flows of a small business and helping to manage cash flow. Diversifying revenue streams is a smart move, bringing cash during the off season and creating a bulwark against accidents in the industry. Accountants of tax preparations, for example, can perform work on salaries for the rest of the year; Lawn care companies can add snow removal to their list of services. However, as Kabbage warns, companies must test their second portion of revenue before committing to ensure that they do not over-exploit resources or invest in an area without market demand.
Cash flow can be difficult to maintain, especially when seasonal companies seek to obtain loans or lines of credit from traditional lenders. But having a backup plan, that is credit, is essential for the survival of a seasonal company. Alternative financial institutions, such as online creditors, frequently have lesser thresholds for fresh companies to meet, allowing them to access short-term credits or rebuild without having worked for a decade or earn millions in effective each year. Kabbage, for example, connects your credit line with real-time data from a small business, which allows the company to adjust credit lines in real time to meet a company’s seasonal needs.
Forecasting Business Expenses Is A Necessity
Seasonal companies not only have highs and lows in terms of sales and revenues, but also in terms of expenses. Because these companies have specific seasons and requests, they also have specific periods in which they prepare for an influx of businesses, which translates into money spent on inventory, personnel and more.
The problem, of course, is that these preseason preparation periods coincide with slower times in terms of revenue, which means the company’s coffers might seem a little empty. Forecasting costs, so that the company has already anticipated these initial costs and have accounted for them, can ensure that the asset does not run out before sales reach their destination. Plan Projections, a company that helps small businesses manage financial projections, explains how seasonal companies can predict expenses by using the account, fixed expenses, and other factors.
Because the elements behind the forecast are often known, seasonal entrepreneurs can look for ways to reduce costs in these areas to increase their margins in advance. For example, if you need part-time administrative help, it can make sense to outsource it to a virtual assistant to reduce overall costs. The rental of the equipment, instead of buying it, may also make sense to eliminate costs, especially for repairs and maintenance, during the off season.
Sustainability Is Created At The Worst Moments
While no company wants to imagine the worst event: a natural disaster, a robbery, a health crisis, seasonal companies are particularly vulnerable to disasters. FEMA reports that 40% of companies can not reopen after a disaster. Other problems, apparently smaller, can also create circumstances that create long-term problems for a seasonal company, from a hole in the roof to a lawn mower with rust. These unexpected costs can quickly increase and run out of the planned budget for the year.
This means that the budget of a seasonal company must be drawn up taking into account these risks, as well as an emergency fund. Most corporate finance managers recommend setting aside three months of business expenses for an emergency fund worth at least a month. This provides a range of seasonal activity to find out how to do Plan B, plus a credit line. This emergency fund must have strict criteria to establish its use so that it does not become another discretionary fund.
Contingencies must include a line item in a seasonal activity budget up to 30% of total expenses. Unexpected budgets are about unexpected costs that occur in a year that are not immediately traumatic for a company, as this is an emergency fund, but they can quickly dilute margins if the leaders are not careful. These can range from inflation to an increase in the price of wood after a hurricane. The money remaining in this particular fund can be transferred the following year and applied to growth initiatives or used to maintain the positive cash flow of the asset.
Seasonal companies may find a path to sustainability, but business owners must remember that a tight window to make money means that safes must be installed. While some, like banks, may consider seasonal business as risky, they can often calculate the risks they absorb, which makes it easier for them to reach the other side of the five-year mark.