Best practices - forecasting / budgeting with a very seasonal business

One thought on seasonality, and really relevant to summer inventory production vs. fall sales, is that your inventory/materials/labor/production space are really considered an asset, not an expense, at least until the items are sold -- you only count the costs as an expense when the items actually sell.  Quickbooks should be able to help you handle this.  This means that you align your expenses with the income they are tied to (i.e. $100 of materials is recorded at the same time as your $200 of sales, showing that you made $100 profit during that month).  Large, publicly traded companies are required to use this method (called the accrual method) as it often is a better reflection of the health of the company.

However, I suspect you will also be looking at cash flow so you don't actually overdraw your bank account, it's obviously a good idea to know how to save in your sales season so that you can cover the investment in new materials and overhead costs during the off season.  After looking at your annual numbers, you should be able to determine your overall yearly budget so you know what you should be able to spend in the off season months, on average, and how much you need to earn in the fall in order to sell enough during the year.  Often, I have seen clients who make sure to keep a certain reserve of cash to help cover the offseason costs.  Or, in the beginning, if they don't have the cash, they carry a line of credit with the expectation they will have income during their peak season to pay off the line of credit.  If you can get a line of credit, that can be a cheaper alternative to a credit card with 20% interest.

One thought on seasonality, and really relevant to summer inventory production vs. fall sales, is that your inventory/materials/labor/production space are really considered an asset, not an expense, at least until the items are sold -- you only count the costs as an expense when the items actually sell.  Quickbooks should be able to help you handle this.  This means that you align your expenses with the income they are tied to (i.e. $100 of materials is recorded at the same time as your $200 of sales, showing that you made $100 profit during that month).  Large, publicly traded companies are required to use this method (called the accrual method) as it often is a better reflection of the health of the company.

However, I suspect you will also be looking at cash flow so you don't actually overdraw your bank account, it's obviously a good idea to know how to save in your sales season so that you can cover the investment in new materials and overhead costs during the off season.  After looking at your annual numbers, you should be able to determine your overall yearly budget so you know what you should be able to spend in the off season months, on average, and how much you need to earn in the fall in order to sell enough during the year.  Often, I have seen clients who make sure to keep a certain reserve of cash to help cover the offseason costs.  Or, in the beginning, if they don't have the cash, they carry a line of credit with the expectation they will have income during their peak season to pay off the line of credit.  If you can get a line of credit, that can be a cheaper alternative to a credit card with 20% interest.

Thank you Dawn, that's all really helpful. And yes - I've been on a cash basis so that it better tracked actual cash flow. I've found this really helpful as I'm starting up and needing to be very careful about keeping income ahead of expenses. I just did a little reading - is the reason to switch to accrual so that for a bank loan, etc. the company looks as healthy as it is all year? (I've found a cash basis really helpful so I guess I'm just wondering what factors should make me consider transitioning.)

I have one quick question for you about the cash reserve but I'll try and find you tomorrow if you have a minute! 

Thanks again!