In business, no two months are the same. For some, their business trends follow the season. For others, a random month of the year seems to be successful, but no one can figure out why. Identifying the seasonality of your business and understanding influencing factors can lead to more accurate forecasting and, best of all, greater financial success.
What is Seasonality Forecasting
Seasonality forecasting uses data to predict fluctuations in sales, demand, inventory, etc. Using industry trends and any historical data specific to your business, your accountant or CPA while typically use a variety of methods and formulas to predict performance and fluctuations based on time of year.
Examples of Seasonality
The go-to, most straightforward examples of seasonality are in holiday-based businesses. Holiday-based businesses typically see the majority of their sales around a specific holiday, like Halloween costume stores and Christmas tree farms. These are the most extreme examples, because the bulk of all annual revenue is generated within 2-3 months of a year.
Many small business owners sell their products during Summer events, like farmers markets, renaissance fairs, and street festivals. These businesses, too, see greater fluctuations in demand and sales, and often structure their workflow to spend the off-season creating product, and the on-season selling that product. Landscaping companies are another great example, and many offer install services in the Spring and Fall, maintenance services through the Summer, and snow removal or storage services in Winter, if in a place where the weather fluctuates.
But, it’s not limited to businesses with a singular focus. You’ve probably noticed that many stores—from big box stores to small boutiques—rotate in products that are likely to sell in that season. In fact, most retailers hire additional staff during the final months of the year to supplement increase in demand. Seasonality also exists within corporate entities and businesses. Many software-based businesses see sales increase at the beginning of the fiscal year, when budget has been reserved to purchase and implement that software. Network television is another seasonal business, with a series run of episodes filmed, followed by a hiatus. Some specialist businesses, from corporations to service-based businesses, will see a downturn in sales over the summer and in the first few months of the year.
Most Businesses Deal with Some Degree of Seasonality
In truth, most businesses will deal will see some recurrent fluctuations in demand, sales, workload and laboring hours. Better understanding the trends in how these fluctuations occur can help you build a stronger, more profit-driven business with greater staying power.
So… what’s the best way to do that?
Tips for Seasonality Forecasting
Let’s get into some actionable tips!
- Evaluate Historical Data – This is the bread and butter. Taking a close look at your data year-over-year, finding recurring patterns, and don’t limit yourself to one time period. This evaluation should consider yearly, monthly, weekly, and sometimes even daily data.
- Investigate – The data isn’t always what it seems. It’s important to investigate apparent recurring spikes in business, and understanding the influencing factors of that time period. This should include everything from inventory and product changes to staffing issues, to broader influencing factors like recessions and consumer spending changes.
- Reprocess Data – While this step might feel redundant, don’t skip it! Removing outliers, erroneous data, factoring out sales booms that were influenced by other factors, and any other non-relevant data will ensure more accurate forecasting.
- Forecast Using the Right Model – This is a note for your accountant more than it is for you. You’ll want to use a model that is designed to capture patterns of seasonality. This could be Exponential Smoothing, Seasonal Decomposition of Time Series, AutoRegressive Integrated Moving Average, and others. (Don’t stress if these terms aren’t familiar to you. Call us! We can help!)
- Seasonal Decomposition – Using STL or another method, separate your time series into parts: trend, seasonality, and residual. You will use this to refine and validate your model.
- Calculate Historical Averages – This should be done for your selected time period. It’s a good way to establish benchmarks and starting points.
- Examine Influencing Variables (or, what we call lagged variables) and External Factors- Identify and examine any influencing factors that would impact seasonality. This is everything from sales, marketing, promotional events, team and customer approach, and really anything that can impact the process.
- Validate Your Data – This is crucial! Now that you’ve identified trends and influencing factors, while weeding out any erroneous information, it’s time to cross-validate and adjust your forecast to ensure accuracy. Again, don’t stress! This is the type of granularity your accountant should provide!
- Document Your Results (and Communicate Them to Stakeholders) – Having an accurate seasonality forecast can be an incredible tool in the board room! This data can be used to determine investment cycles, how to counteract downward seasonal trends, and what can be done to make the most of those peak periods in business.
These are just a few tips (yes, really! We could get so much further into the weeds about the technical components and calculations) to get you started. Don’t hesitate to reach out to an accountant or CPA consultant if you’re overwhelmed by this or unsure how to get started. Accuracy of your benchmark data is crucial!
How to Use Seasonal Factors to Forecast
Returning to our examples, the Halloween costume giant Spirit Halloween is a great example of using data and seasonal forecasting to set business strategy. Since costume purchases spike around this major holiday, it is, of course, predictable to see a spike in sales. Spirit Halloween, through the help of some very savvy accountants and business partners, built a unique strategy. Utilizing short-term rentals of vacant buildings, Spirit Halloween maintains brick and mortar locations, often at a discounted rate, only in the months leading up to and immediately following Halloween. With an online store to supplement sales throughout the year, and post-holiday discounts driving a final revenue pop of the season, Spirit Halloween only has the rental costs and overhead associated with in-person shopping (i.e. sales staff, utilities and rent) when their sales are the highest.
For most businesses, however, seasonality may not be so obvious or cut and dry. You could be a company who sees a consistent sales spike from March to April and in September. Or, you might notice that your staff has less to do from November through January. The most important aspect of using seasonality for forecasting is getting reliable, accurate data and identifying predictable and reliable trends in your business.
An initial way to get a broad generalization is to generate a report on historic sales data for all the years you’ve been in business. Looking at the chart, you can easily see the fluctuation is sales over time, and select peak periods and low periods to begin to determine potential factors. It’s important in this process to consider all the influencing factors that may not be related to time of year (i.e. Did you lose one of your star sales people and see a dip in sales shortly after? Were you trying a high-cost marketing strategy that increased sales, but not necessarily revenue?). You also absolutely must look at all of your reports over time to fully understand the trends in your business.
Once you have an understanding of the seasonality of your business, it’s important to dive in and understand how staffing, product availability, marketing, and other elements of your business can help you make your high season even more profitable. It can also help you determine new ways to approach the slow season. A huge component of forecasting is understanding your business goals, budget, and strategy in order to accurately predict what your revenue will be.
Expertise and Guidance from an Accounting Consultant
This article is absolutely a general overview, and that’s because every business is unique! Many Christmas-themed bars see success year round, with an extra pop during Christmas in July. Some businesses find niche ways to combat the seasonality of their business, and others will want to utilize forecast data to make other business decisions, like taking the phone number off of the website during high lead seasons, or implementing Summer Fridays or September break. The best thing you can do is speak to an accounting consultant about your goals, and invite them to analyze your historic data to help you identify trends in your business and forecast around them. The more information you have about your sales cycle and fluctuations in revenue, the more empowered you are to build your business in a profitable direction.
