Plan For ‘Seasonality’ is Foundation for Business Success
By Clint Reecer | November 14, 2014
With the Balloon Fiesta still fresh in everyone’s mind, it is important to note that not all businesses in New Mexico have the same sales volume year-round.
Just like the vendors that come and go with the Fiesta, many businesses experience months of both high and low sales volume depending on the time of year. This concept is referred to as the “seasonality of sales,” and planning for it accurately is a critical component of successful business ownership.
An important part of planning for seasonal slowdowns is determining your business’ fixed and variable costs. Fixed costs are expenses that exist whether your business is selling product or not, and whose amounts do not change as sales increase or decrease. For example, expenses such as rent, insurance premiums and loan payments would be considered fixed costs. By contrast, variable expenses increase and decrease with sales volume; examples of variable costs could include materials used to make your final product, or gas used in delivery vehicles. It is important to note that a portion of variable costs could be fixed, as is frequently the case with utilities. Distinguishing between these costs and estimating dollar amounts for both is critical to determining how much you need to compensate for a seasonal decrease in sales volume.
After estimating what expenses you will need to cover during a seasonal slowdown, the next step is to determine how your business will satisfy that financial need. The best way to meet that goal is to create a year-long savings plan that allows for extra cash to be available during slow sales periods. During months of high volume, successful entrepreneurs will set aside a pre-determined amount of cash to be used during months when the business is planning for lower revenue. Once you estimate your need, determining the amount to save each month is not complicated; find the sum total of your estimated expenses during slow months and divide that figure by the number of months with normal or high sales. For example, if you need $1,000 a month for 4 months of low revenue, you would need to save $500 a month during the other eight months of the year. It sounds simple, but making a plan to save (and sticking to it!) can make or break a seasonal business.
Most seasonal business owners can tell you exactly when their yearly “slump” is; the most successful entrepreneurs are the ones who take the extra step and plan for it well in advance. Knowing fixed and variable costs is critical for any business, but is especially important for responding to seasonal variations. Similarly, preparing for slow seasons with diligent saving is a key component of reducing the financial impact of low revenue periods. By acknowledging and planning for the seasonality of your business, you can create a foundation for year-round success.
(You can also view this blog in the Rio Rancho Observer)
About the Author
Clint is a native New Mexican who is passionate about assisting the small business community throughout the state. He has a B.B.A. in Finance and an M.B.A. in Management of Technology, both from the Anderson School of Management at the University of New Mexico. Clint specializes in using technology to improve small businesses, and in 2012 was awarded a “Titans of IT” designation by New Mexico Business Weekly for his ongoing work with local companies. He also has a great deal of experience managing the finances of small business, and his consulting approach emphasizes sound financial management as a core business practice.