Seasonal retailers experience fluctuations in demand throughout the year. These fluctuations lead to dramatic increases in profits during peak seasons and relatively low profits outside those seasons. Managing these fluctuations requires seasonal retailers to find ways to maximize their profits during peak seasons while managing the financial stresses that come with decreased cash flow throughout the rest of the year. This requires careful planning and an understanding of how to adjust your business operations to balance these fluctuations.
Revenue Forecasting
Seasonal fluctuations in demand directly impact inventory management. Failure to optimize your inventory in response to these fluctuations can make it difficult to maintain stable cash flows outside of peak seasons. Without accurate sales predictions, businesses run the risk of having a surplus of inventory that ties up cash and reduces profit margins. Revenue forecasting can mitigate this by giving you a more accurate estimate of future sales and giving you a tool to better predict fluctuations in demand. Accurate forecasting makes it easier to scale your business.
Revenue forecasts rely on your business’s sales data from previous years. The data most likely to serve as a good predictor for upcoming years will be that which has been generated within the last few years of operations. You should be able to use this data to identify sales patterns and trends that will help predict demand.
When analyzing sales data, look for answers to the following questions:
- On what date do sales begin to regularly increase?
- On what date do sales begin to drop off?
- Which products were the most popular?
- How much does this data vary between different years?
Using your sales data, calculate a variety of scenarios to see how different forecasts will impact your business. How much variance between your forecast and the actual cashflow of the upcoming year is likely? In the event things don’t go as predicted how will you respond? Your revenue forecast should provide you with the time frame your business will see sales peak and which products you will need on hand to meet demand. Use this information to assess product costs and determine how much capital you will need to meet them.
Preparing a Budget
The volatile nature of demand makes inventory one of the hardest expenses to manage, this is especially true for seasonal retailers. Retailers who have inadequately prepared for this volatility can find order sizes being dictated by what funds are available to them. Inadequate financing can lead to a shortage of inventory, leaving companies unable to fulfill orders, keeping them from taking full advantage of increases in demand. Companies that experience rapid growth will feel the impact of inadequate financing especially hard as growth demands an ever-expanding inventory, if caught off guard businesses will struggle to meet new demands if older models fail to account for it. Businesses that can’t meet demand will ultimately see a loss in sales, hurting their future growth potential.
Being prepared to meet demand requires you to understand what your inventory costs will be and when you will be expected to pay them. The best way to find this information is to contact manufacturers and distributors directly to ask for product costs and terms of payment. Will you need to pay the full cost of inventory upfront, or can you place an initial deposit and make payments on the remaining balance? While some manufacturers may be willing to delay payment for large customers, it’s unlikely to be an option if you operate a small business or you don’t have a long-term partnership with your manufacturer.
Although managing inventory is critical for growth and a major expense when preparing a budget, businesses have other costs to consider. These include things like website management, labor, and warehousing. The ability to maintain reserve funds is also an important consideration for your business. Having funds set aside to protect yourself from volatile fluctuations in demand can help mitigate damage when things go awry. If sales fail to meet those predicted by your forecast, reserve capital can be used to make sure you meet fixed costs and other expenses incurred during your business’s slower periods.
Account for Lead Times and Payment Terms
Lead time is the number of days it takes for you to receive your inventory starting with the day you place your order with your supplier, i.e., how long it takes your supplier to fulfill your order. Lead times are used to determine when to place orders and when you need to have the funds to pay for them.
Some types of manufacturing can take months, for example, outdoor furniture – a seasonal product typically at its highest demand during the spring. Months-long manufacturing periods will require even longer lead times, in some cases businesses will need to place orders for products over half a year in advance (e.g., placing an order in September to have products available the following March). To ensure deposits are ready when an order is placed, a company placing would need to explore financing options at least a month prior to ordering, meaning that a retailer would need to begin preparing for March sometime in August.
Furniture manufacture is only one example. While lead times can be months long in some cases, on the other end of the spectrum lead times can be as short as a few weeks. Lead time will be wholly dependent on a company’s business model and the industry in which it operates. For example, sellers of perishable commodities like food typically have a lead time of a few weeks for suppliers to fill their orders.
Talk with multiple suppliers to understand the average lead times for your industry and the products you carry. Speaking with multiple suppliers can also give you a better understanding of the payment options that are available to you. Consider using these conversations to negotiate for better terms. A common way to negotiate longer repayment terms is by paying slightly higher prices for goods received. Naturally higher prices increase your cost of goods sold, however, paying for inventory in installments could help you to avoid borrowing additional capital before your peak season. Use your budget when weighing the pros and cons of the options available to you when negotiating with suppliers.
Budget for Year-Round Expenses
Preparing an annual budget will help you determine how much cash you will need for operations all year round. Use data from prior years to prepare financial statements that detail your company’s monthly cash in-flow (income) and your year-round operating costs. A lot of your company’s operating costs will likely remain consistent throughout the year regardless of projected income (e.g., rent, webhosting services, and internet).
Some operating costs can be adjusted to meet current operations, i.e., scalable costs. Determine which of your operating costs are scalable. Adjusting these expenses to reflect your sales will provide an opportunity for you to reduce costs outside of peak season. For example, reducing inventory to reflect a diminished demand is a clear way to scale operating costs to lower expenses. Because you will no longer need as much space to physically store inventory during these times, consider whether you can simultaneously reduce your warehousing costs as well.
Other examples of utilizing scalable costs include renting a seasonal warehouse, hiring seasonal delivery staff to minimize labor costs, or using revenue based financing to borrow capital.
Explore Revenue Based Financing
eCommerce businesses will typically have fewer assets to borrow against, making traditional business loans more difficult to secure. An alternative to traditional loans is revenue-based financing. Revenue based financing is also particularly advantageous to seasonal retailers because, unlike traditional financing, repayment is scalable to your sales as repayment is calculated as a percentage of sales. Using revenue-based financing means that repayments will be higher during your peaks season when you have greater cash-inflow, and then reduced outside of that season, reflecting the volatile nature of sales for seasonal retailers.
With the right preparations and a plan for scaling your operating costs to meet changes in demand and subsequent changes in sales, you can smoothly operate your seasonal business: allowing you to both adequately meet the demand of your boom periods and to weather the more trying slow periods.
