by Meaghan Brophy
Creating a financial plan for your business is an essential step in preparing for a successful year. The rush of the holiday season is long behind us and busier spring months are right around the corner. Now is the perfect time to take a step back, evaluate your business objectively, and map out a guideline for the year. When setting your strategy, keep the following tips in mind.
Embrace the Seasonality
Like any business, retail has a busy season and slow season. Embracing this flow instead of fighting it will help stabilize the business, and allow for better planning all year round. Typically, according to Stephen Sheinbaum, founder of Bizfi, January 1st through Valentine’s Day is the slowest season for retailers. As we approach the end of that season, many of you may have experienced this drought first-hand. However, by knowing slow seasons ahead of time, it is easier to prepare for the cash flow drain. First and foremost Sheinbaum recommends downsizing your labor force if possible during slower months. A common fix for this is hiring seasonal employees for times your business is expected to be busier. Knowing when your busier times are also means stocking up on inventory ahead of time and participating in more advertising options. Maximizing sales during known rush seasons is critical to annual success.
Maximizing sales during known rush seasons is critical to annual success.
It is also important to factor in the seasonality of your business when looking at monthly reports and income. Sam Graziano, CEO of Fundation, says that only knowing monthly totals is a common mistake he sees many small business owners make. Since there are some months that are known to be more profitable than others, it is hard to determine an overall sense of your businesses’ financial health by looking at a monthly P&L alone, even when comparing it to other individual months. For many retailers, January and February are expected to have small, if any, profit margins. November and December are expected to have the largest profit margins. To get a more reliable sense of your business’ complete financial health, look at larger chunks, like quarterly profits and year-over-year profits. Predicting and embracing these ups and downs will help you manage a steady cash flow throughout the year, instead of depending on month-to-month.
Start financing as early as two quarters ahead. Graziano explains that financing can take as little as one day to set up, or up to several months depending on your situation and what options you are looking into. It is recommended that businesses start planning and financing for the holiday season during second quarter. Gearing up for the rush early allows for more efficient planning. By financing early, businesses can stretch holiday expenses throughout the year. Even if stocking up on inventory a little each month isn’t logistically possible, having the cash flow early to set aside each month eases the burden and allows for more thorough planning. Likewise, if first quarter is typically a slower season, ration out extra income from busier seasons the previous year to make sure there is always cash on hand.
Understand All Your Options
Now more than ever, small businesses have almost unlimited options when it comes to finding financing. After the 2008 financial crisis, it was almost impossible for small business to be approved for a traditional bank loan. This created a need in the finance market to provide businesses with other options. Steve Denis, Executive Director at the Small Business Finance Association, explains that there are many alternative lenders and financing options that have popped up over the last several years. While traditional bank loans are now more readily available, they no longer hold a monopoly on the market. Denis refers to the increase in options as the “uberization” of the small business finance world. “We now have peer-to-peer lenders that connect borrowers to businesses. There are tech platforms that use nontraditional methods to determine credit worthiness. These methods are much quicker than banks where you have to go and fill out an application and explain why you are looking for a loan. With some of these new methods, there are more metrics involved to determine if the business is worthy of a loan or not. Then there are merchant cash advances, and of course traditional loans,” explains Denis.
Within all of these options, there are various aspects of which retailers should be aware. For example, with a direct or peer-to-peer loan, the business receives a loan upfront, then there is an APR and the money is repaid like any other traditional loan. With merchant advances, you receive money upfront and then the loan is repaid through a predetermined percentage of your business’ future sales. This is a more income-based repayment method compared to traditional models. Graziano advises that small business owners need to be aware of brokering options. “Brokers, their job is to find the right lender for a given customer. They get commission for doing so, which raises the cost of the financing. However, this could be a worthwhile option for someone who doesn’t have the time to find the right option for themselves.”
Once you do decide on a type of financing, and whether you will use an advisor or not, the most important thing is to truly understand the document you are signing. According to Graziano, there are three important questions every small business owner should ask before signing:
1) How much will I get upfront? You want to know exactly how much money you will receive, in what form, and when.
2) What am I paying in fees? It is not uncommon for financing options to have different upfront or ongoing fees. You want to know exactly how much these fees are, why you are paying them, and when to expect them.
3) What are the implications of paying off early? Repaying a loan early seems like a good thing for your business and a way to save money, but a lot of products have a big penalty for paying off early. All of the income that the lender would have received is not being written off. It’s being accelerated and factored into your early repayment. There are some providers that will encourage borrowers to do refinancing to keep them from paying off early, so they will keep making more and more money. “It’s really just making sure you understand clearly the economic terms of what you’re signing up for and that it’s something that you’re comfortable with and will be able to pay back,” concludes Graziano.
With careful execution, financing is a very effective and sometimes necessary means of growing your business. Steady cash flow year-round means steady inventory, advertising, and staffing which all lead to increased sales. No matter which financing option you choose, all of our experts agree that the best thing a business owner can do is to be prepared. Have a good explanation for what the capital is for, what your top line looks like on a month-by-month basis, where your seasonality falls, etc. Being able to demonstrate strong business acumen and talk about your financials will give lenders confidence in your abilities as a business owner.
Most lenders ask for three months of recent commercial bank account statements and two years business tax returns. In some cases even financial statements from the general ledger. Bringing a copy of your business lease and any future business plans is also helpful.