Identifying Seasonality Within Businesses

In today’s economic climate, the majority of businesses are subject to a varying degree of seasonality. Whether you own a landscaping business, or manage a local coffee shop, your business is likely to be impacted by seasonality. Seasonality refers to recurring fluctuations in either supply or demand that occur throughout the year. These ebbs and flows in business can be the result of social, cultural, and environmental factors. 

Seasonality is most evident in businesses through changes in the weather. For example, occupations like landscapers and delivery drivers both experience seasonality but in a different capacity. A landscaper typically conducts the majority of their business during the spring, summer and fall, when conditions are favorable for working outdoors. Whereas, the winter provides delivery drivers with an opportunity to make more money, as many customers prefer to stay home and order their meals to be delivered.

In addition to the weather, social and cultural factors play a significant role in seasonality and a business’s income. For example, cultural traditions such as holidays or life events like graduation or vacation create a positive impact on travel, lodging, and tourism industries. Similarly, social events like live entertainment or sporting events produce a seasonal boost in the income for many businesses. 

Now that some of the factors that can impact seasonality have been identified, what are some of the tools or financial instruments that can be used to identify seasonal trends?

1. Profit and Loss (P&L) Statements: monthly/quarterly P&Ls are an effective tool to identify and track seasonality. Analyzing a business’s P&Ls provides business owners with valuable insight regarding changes in earnings, costs of goods sold and operating expenses. Furthermore, when observed over an extended period, P&Ls can identify patterns in consistency and opportunities for growth.
2. Balance Sheets: a balance sheet provides a snapshot of a business’s financial position at a certain point in time. In the context of seasonality, it can be useful for identifying fluctuations in inventory during peaks seasons, as well as detecting spikes in accounts receivable that arise from increased consumption.
3. Cash Flow Statements: business owners can use the Cash Flow Statement to analyze their operating, investing, and financing activity. Unlike the P&L, which recognizes revenue and expenses at the time they are incurred, the Cash Flow Statement reflects actual receipt and disbursement of cash through business activity. By monitoring cash collections, disbursements, borrowing, and repayment, owners can identify seasonal patterns that recur year after year.

When analyzing the data on financial statements, it is important to distinguish between recurring seasonal patterns or one-time anomalies. A recent example of such an anomaly was the COVID-19 pandemic, during which many businesses experienced either a surge or decline in activities. For medical professionals such as doctors and dentists, increased time at home prompted many individuals to schedule their overdue appointments, despite healthcare providers potentially operating at a limited capacity. In contrast, service industries such as bars and restaurants were significantly impacted by restrictions imposed and reduced consumer activity. Since the conclusion of the pandemic, many surviving businesses have experienced a return to normalcy, resulting in more stable economic conditions. 

In conclusion, it is essential for business owners to leverage the financial tools available in order to recognize seasonality. Beyond a measure of compliance, financial statements can serve as a strategic tool to help businesses manage cyclical performance and develop informed predictions regarding future conditions.