Seasonality describes the natural fluctuations in a business’ sales due to cyclic customer demands. In the past, this has been very obvious for a small seasonal business that, for example, sell surfboards in the summer or Christmas decorations in the winter; it is inevitable for these products to only be in demand at certain times of the year. Despite these anticipated fluctuations, it is still difficult for a business to be profitable when income is neither consistent nor guaranteed. Therefore, it is important to plan for seasonality and build it in to the business model. Here we consider ways in which this can be done.
Determine the monthly expenses
The monthly expense should factor in fixed costs, such as loan payments and insurance, and the variable costs, such as inventory costs and utilities. With the monthly expenses baseline, you will be able to budget and meet the minimum monthly expenses. To accurately determine monthly baseline expenses, it is vital to track every expenditure for a whole cycle to ascertain what the bills for the next year could look like.
Count the seasons collectively
In a business, when instant performance feedback is needed, it can be tempting to analyse it at the end of every month so that timely improvements can be made. However, in a seasonal business, operating in this manner will seem misleading as some months performance will seem excellent and in others, it will appear to need much improvement. Therefore, seasonal businesses should consider performance over the entire year so that a better understanding is gained and more strategic operational decisions can be made.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. When not writing about inventory management, you can find her eating her way through Auckland.
Stick to the plan
The budget in a seasonal business must be conservative during the high-peak season to allow for the low-peak months when business will be slow. The temptation is to spend freely when the pressure is off, however this is exactly the time when the budget must be followed stringently. The worst outcome would be to overspend during the profitable season forcing the company to not meet even their most basic of financial obligations during the off-peak season.
Recuperate in the off-season
Do not view the off-season as an unavoidable evil that you must tolerate every year. Rather view it as a time to recover from the busy season and plan for the next. Planning and preparation could include adjusting budgets, brainstorming ways to recapture buyer loyalty even during slow periods, analysing and updating operational procedures to better reflect the company’s direction, and negotiating with suppliers. The off-peak season is a time to fine-tune processes for an even more profitable peak season.
Have multiple budgets
Due to fluctuations in a seasonal business, it can be detrimental to have one rigid budget to service the entire cycle. This will simply be inaccurate for certain situations and may mean the company overspends when they should be saving. Therefore, it is extremely helpful to have at least three budgets predetermined for the different seasons. One budget is for the baseline expenses that remain largely the same and must be paid. The subsequent two budgets are for the best and worst-case scenarios respectfully. Having these budgets means everything is planned and accounted for when there is excess and the company can spend, and likewise when business is slow and the company must be frugal. Proper planning means there are no surprises which ensures a business can adapt to whatever comes its way while remaining increasingly profitable.Topics: inventory management, seasonal demand