How I Evaluate Working Capital Cycles in Seasonal Businesses
When I buy a seasonal business, I know that working capital cycles can make or break its success. Over the years, I’ve learned that seasonality creates unique cash flow challenges. Businesses might earn most of their revenue in a few peak months, but expenses like payroll, rent, and debt service continue year-round. If I don’t study these cycles carefully, I risk buying a company that looks profitable on paper but struggles to survive off-season.
Why Working Capital Cycles Matter
Working capital cycles matter because they:
- Determine liquidity during slow months
- Affects how much inventory is tied up before busy seasons
- Shape vendor and supplier relationships
- Impact the ability to pay debt consistently
- Define how much cash reserve I need
If I don’t model cycles accurately, I walk into liquidity traps.
My Early Mistakes
In one acquisition, I underestimated how much inventory was required before peak season. Cash flow dried up, and I had to inject personal funds.
In another case, I assumed a line of credit would cover gaps. Instead, lenders tightened terms mid-season, leaving me scrambling.
Those mistakes taught me that working capital in seasonal businesses must be studied with precision.
How I Evaluate Cycles
- Monthly Cash Flow Data: I analyze three years of monthly inflows and outflows.
- Inventory Swings: I look at how much capital is tied up before high-demand months.
- Receivable Timing: I study how long customers take to pay during busy seasons.
- Payable Terms: I check whether suppliers align terms with seasonal revenue.
- Debt Service Coverage: I model whether cash flow covers payments during slow months.
How I Manage Cycles Post-Acquisition
- Build cash reserves in peak months
- Negotiate seasonal lines of credit before closing
- Use temporary staffing during high demand
- Diversify revenue streams to smooth cash flow
- Plan vendor terms around seasonality
Final Thoughts
I’ve learned that seasonal businesses live or die by working capital cycles. That’s why I evaluate them carefully, negotiate deal terms with cycles in mind, and build buffers after closing.
I continue sharing my acquisition frameworks at drconnorrobertson.com, where I break down how I model risks like seasonality.