Life can be stressful for the small business owner; it comes with the territory. So anything that can reduce that stress is more than welcome in my life. Anyone who knows me well knows that one of my favorite things (in business) is annuity payments on seasonal work.
Seasonal businesses make most of their money during their peak season, and they can take on many forms: ski resorts, beach motels, landscaping, and yes, tax preparation.
An annuity simply means creating a stream of future payments from an event now. That event is client work. So it becomes clear why this is a stress reliever. One of the biggest culprits of stress in my business is uneven cash flows.
The traditional tax practice performs the majority of its client work between January and April, and to be more realistic it’s more like February 15th to April 15th. So, cash flows tend to look like a bell curve between those two dates – tapering down towards either end.
That means if no one goes on extension, it could be TEN MONTHS before repeat clients pay again or new leads become clients and eventually pay. So if you’re in a seasonal business, you spend the rest of the year just trying to budget (read: “not go broke”) until your next peak season rolls around.
Structuring payments from this work over a longer period, say 12 months, is one solution to this problem. This lets me know that I’m going to be able to buy groceries for the rest of the year for work I did in February. I can tell you that’s a great feeling. It also lets me gauge where I am in my business by this monthly annuity amount. I can see it go up or down over time and I can set goals with it. On the receiving end, clients usually respond well to this option because it helps match the fee with their cash flow.
The downside is that you open yourself up to the risk of customers bailing on you before they’ve made all twelve payments. Selecting quality customers from quality referral sources is a key to success with this option. Taking on low quality clients is a different problem all together.
Also, I don’t think I’ve ever achieved 100% annuity on client payments; so I usually still have several payments in full received during my peak season. Intentionally maintaining a certain percentage of traditional payments may help balance this risk.
Conventional wisdom would likely say to accelerate payments as quickly as possible, but I believe that in the right circumstances slowing down payments can create a win-win for both you and your clients, especially if you’re in a seasonal business.
Bryan is a recent cliff jumper looking forward to running a firm his own way. He aims to catalog his experiences here for future generations of cliff jumpers to learn from. Starting in January 2015, he will also be the Visiting Instructor in Accounting at Assumption College located in Worcester, MA. Bryan is also the co-host of a new podcast, Ctrl Alterego, which follows the saga of two new businesses in different stages of development. He has joined forces with Barrett Young of The Green Abacus for this adventure. Follow along atwww.ctrlalterego.com.