It’s the holiday season, which is the most wonderful time of the year for many of you ecommerce sellers. Your well-crafted plans are jumping into action, and I hope your bank accounts will ring with record-breaking holiday profits!
While you might not think you need to be concerned with cash flow management during the seasonal surge, it’s equally vital to have a robust holiday cash management strategy in place during these times of plenty. This season calls for a diligent approach to cash, and I’m here to walk you through the essential steps. But first, let’s delve into why a cash strategy is paramount during the holiday season.
Holiday Profit Strategy
The fundamental reasoning behind this is grounded in Parkinson’s Law, named after C. Northcote Parkinson, an economist with the British Naval Army in the 1950s. Parkinson’s Law, in simple terms, asserts that “we use what we got.” It’s a principle that applies to all resources, including money.
In the world of cash flow management, consider a brand-new tube of toothpaste – when it’s fresh, you might not think twice about how much you use daily. However, as it nears its end, you become more frugal, squeezing out the last remnants.
This scenario likely sounds familiar, and it’s precisely what Parkinson’s Law predicts. It’s also a key component of the Profit First cash management approach, a methodology I hold in high regard.
Now, let’s apply Parkinson’s Law to your cash reserves. The fourth quarter of the year is when you typically find yourself with more cash than usual. However, if you let that holiday profit idle in your bank account, you’re bound to find ways to spend it impulsively.
The mentality of “I’m flush with cash!” can lead to hasty decisions like buying a new computer, launching new products, or indulging in personal expenses. As Parkinson aptly pointed out, we tend to use what we have, and this is precisely why a cash strategy is essential at this juncture.
Five-Step Cash Management
Let’s walk through the steps that will guide you through effective cash management during this period:
Step #1: Calculate the amount needed to cover your regular monthly operating expenses. Take a close look at your year-to-date Profit and Loss statement, broken down by month. This will help you determine your average monthly operating costs.
Step #2: Assess your inventory-related obligations. If you’re diligently tracking accounts payable on your books, you can easily find this information on your balance sheet. For those using credit cards for payments, identify the expenses attributable to inventory.
Also, consider any upcoming inventory-related expenses, such as fulfillment and shipping. Following the Profit First approach, I recommend maintaining separate bank accounts and credit cards exclusively for inventory-related items, distinct from your operating expenses.
Step #3: As your holiday profits roll in, ensure that you leave enough funds in your primary checking account to cover projected operating expenses and anticipated inventory costs. Any surplus amount should be promptly transferred to a dedicated savings account. If your payouts are biweekly, consider allocating funds from the first payout of the month to your savings.
Step #4: Exercise discipline and refrain from dipping into the savings account until the new year begins. After the hustle and bustle of year-end activities, consult with your accountant to determine your tax obligations. Allocate the necessary funds for tax payments.
Next, assess your business goals for the upcoming year. Will you be launching new products? Do you need to set aside funds for sales tax compliance, or do you anticipate margin erosion due to tariffs? Once you’ve identified your goals and associated costs, earmark funds accordingly for these initiatives.
Step #5: Lastly, don’t forget to reward yourself! In line with Profit First principles, consider setting aside a portion of your profits from each payout. This year-end strategy not only sets you up for a prosperous new year but also aligns with the Profit First principle of rewarding positive financial behaviors.
Focus on the Long Term
The holiday season can be exhilarating, but it’s also a crucial time to exercise financial prudence. By following these steps, you can safeguard your business’s financial health and set the stage for a prosperous future. Remember, being a successful business owner is about more than just surviving the holiday rush – it’s about thriving and reaping the rewards of your hard work.
If you need help implementing your 5-Step Strategy or are looking for advice on how to invest all that extra cash into your business, we’re the ecommerce experts for you! Reach out to the bookskeep Team today!