Seasonality refers to fluctuating business conditions that correspond to defined seasons, such as winter or Christmas time. During peak seasons, demand tends to be high, and supply chains are typically strained. Inventory stock is often in short supply. On the other hand, businesses often struggle with low cash flow during the off season and experience a heightened pressure to get the basic aspects of running a business right. Seasonality occurs where trading patterns have a periodicity of roughly 12 months – in other words, seasonality can be identified where a business experiences regular, predictable fluctuations in trading conditions over the course of a year.
How do business cycles differ from seasonal fluctuations?
Like seasonality, business cycles also involve business conditions fluctuating over time. However, it is important to note that seasonality and business cycles are fundamentally different phenomena. Business cycles occur over a much longer period of time and essentially involve periods of economic growth and contraction. Economies rarely demonstrate continued, unbroken periods of growth in the long run. Rather, most economies also experience slowdowns from time to time. At some points, an entire economy may shrink, with businesses producing less output than before. Although seasonality and business cycles both involve fluctuating conditions over time, business cycles differ in that they occur over a longer time scale and are not specific to any one product or industry.
Managing seasonality and inventory stock
Any astute businessperson will plan for seasonal variations in consumer demand and the supply chain. Businesses naturally expect lower sales and revenue during their off seasons and, if they are well prepared, know to expect difficulty procuring enough inventory stock during the height of peak demand. Although planning for seasonality has its challenges, almost any business should be able to be well prepared to trade through every season. As most businesses do, in fact, trade through the off season, by keeping inventory stock lean, carefully controlling cost and setting aside capital to fund working expenses in the off season, most are able to stay afloat between peak seasons.
Dealing with a prolonged downturn
Managing business cycles is inherently difficult. Despite many claims to the contrary, few people can predict when an economy is likely to experience a prolonged period of stagnation or shrinkage. Although business owners can do their best to operate as efficiently as possible, in reality most small to medium-sized businesses are not well placed to weather a recession. This is not to say that most businesses are likely to fail during a downturn in the business cycle. By adjusting to prevailing market conditions, most businesses are able to trade through the downturn. Rather, fewer businesses trade profitably and continue to grow during a downturn in the business cycle.
Businesses can prepare for major downturns by addressing some of the key risk factors in a recession. Businesses that are highly leveraged, which hold large inventory stock volumes or which have high overheads may be at a higher risk of failure. One option for businesses that wish to reduce their risk may be to reduce inventory stock, pay off debt and, where possible, reduce high fixed costs.