Any business experiences highs and lows, although some businesses experience those fluctuations more than others. Some businesses are highly dynamic because they are poorly managed, but for most businesses the main culprit is seasonality.
In the small business context, seasonality refers to fluctuations in some of the main business metrics (sales, revenue or new customer acquisition) that correlate with seasonal climate, holiday periods and major cultural events. These metrics have a major impact on a business’ profitability and, as a result, are one of the key considerations when preparing the coming year’s budget. Here are some key points to keep in mind when accounting for seasonality in your budget.
Getting to grips with fixed costs
A good first step in accounting for seasonality is to understand what your business’ fixed costs are at the quietest time of the year. In other words, what are the baseline costs that your business is guaranteed to incur even if sales are poor? This sets out a clear minimum standard of cashflow that the business should aim to meet during the off-season. In practice, this might not be possible for highly seasonal businesses – particularly if the business only operates during the seasonal peak.
Costs such as rent, insurance and professional services fees fall into this category. It may also be prudent to include the costs of major items such as plant and machinery for manufacturing inventory in this category, even though they may be infrequent expenses which are depreciated over time. This is because these items may have ongoing financing costs, or because a business may want to set aside money to cover future replacement costs.
Reducing your business’ fixed costs is a good way to take some of the pressure off during the quiet season, particularly in an especially lean year. On the other hand, think carefully before you cut costs too drastically – will spending less in the quiet season compromise your business’ ability to close sales and deliver orders when it’s time to make hay?
Budgeting for peak season
The other side to seasonal budgeting is, of course, budgeting for peak season. For manufacturers, this might mean thinking closely about hiring additional staff, manufacturing inventory or partnering with contract manufacturers. All of these business decisions have an impact on the budget, therefore it’s important to track these carefully.
When cash is flowing freely it can be easy to loosen your team’s grip on expenses – contract manufacturing, for example, may be the easiest way to keep up with demand. On the other hand, the easiest way to make it through peak season might not be the most profitable. Contract manufacturing tends to be the expensive way of manufacturing inventory and can eat away at profits that would otherwise see your business through the leaner season. By applying a budgetary lens to every major operational decision, you’ll be forced to have the hard conversations with your leadership team – what are the tradeoffs, and is there a cheaper way of achieving substantially the same result (in this case, you might consider running an evening shift instead of outsourcing production).