Picture an amusement park. During the summer when kids are out of school, the park is crazy busy. It’s staffed by younger college and high school kids, who are also out of school.
What happens in the fall when everyone goes back to school?
Business drops off severely. When the weather is nice, the park may get good business on the weekends. But on a weekday? Dead!
This is a cyclical business.
Even in the case of a big park like Disney, there’s some cyclicality, particularly around the holidays. Disney may never be “dead,” but it experiences spikes around holidays and seasons such as Christmas, spring break and summer.
Amusement parks aren’t the only businesses that experience cyclicality. Colleges, HVAC businesses and even some restaurants experience cyclicality, and the list goes on.
But how do you make it through these feast and famine cycles, as I like to call them?
1. Recognize that you have a cyclical business. This is half the battle. My definition of a cyclical business is one where you do not get the same results every month.
Feast is when you have more business than you can typically deal with. Famine is the opposite—you have little to no business, and the sustainability of the business could be an issue.
Picture a landlord who receives rent every month. That’s not cyclical because he or she collects the same amount of rent every month year in and year out. Then think back to the amusement park. Do you think that park collects the same amount of revenue every month year in and year out?
These feast and famine cycles are typically driven by some underlying cause, such as the calendar or weather.
Why is your business cyclical?
2. Make a plan for what to do between the spikes. How do you run your business with low levels of incoming revenue in the slow periods?
Planning is the key. If you’ve gone through these cycles before, you can tell from a historical perspective approximately how much money comes in and goes out during each period of time.
I recommend looking at a 12-month timeline of revenues and expenses to try to understand what you’re going to need to have on hand during the slower periods in order to pay for the expenses.
Typical slow-period expenses are rent, salaries and benefits (if you employ full-time, year-round people), and utilities.
Once you model those numbers to understand what your feast and famine periods look like, then you can plan for taking some of that excess cash during the feast period and saving it for the famine period.
3. Squirrel away “rainy day savings.” During the feast time, you have to take some of that harvest and save it for the famine. A good rule of thumb is to have 3–6 months of savings. But what does that look like?
For me, it’s 3–6 months of fixed costs such as utilities, rent and people costs.
Think about storing canned beans and bottled water in the cellar—except you’re actually going to use this money!
Your plan will allow you to understand what 3–6 months of those costs look like, how long the famine cycle is and how much cash you need to have on hand to sustain your business and make it to the next feast period.
Planning is the glue that holds it all together.
Are you tired of wildly fluctuating cash flow with a severe cash crunch at certain points throughout the year?
Planning will tell you what’s coming. Once you understand the cyclicality of your business and the numbers that go with it, you can plan for these cycles and make adjustments so you have a viable business coming out of those slower cycles.
If you’re tired of struggling and crave peace of mind, I can help. I work with clients to develop the right plan for them so they can stop worrying about finances and get in control of the numbers.
Let’s have a call and discuss how we can stabilize the feast and famine cycles of your business. Click here to schedule.