Seasonality – What is seasonality?
Seasonality is a recurring, predictable change in the level of business activity throughout the year.
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Most businesses experience a change in the level of business activity throughout the financial year; however, seasons have a greater impact on some businesses than others.
Seasonality can be caused by several different factors, suchs as the tax year, the weather, religious festivals, or school holidays. ‘Seasons’ can therefore be either calendar seasons or commercial seasons.
For example, gardeners or landscape designers might do the majority of their work during the summer, while accountants are likely to busiest around the year end, which is when businesses need to close their books.
Because seasons can have a big impact on a company's level of business activity, it's important to understand the effects of seasonality. By understanding seasonality, company directors can schedule employees' shift patterns and manage their inventories to fit with seasonal demand.
For example, a commercial retailer might give employees additional shifts or take on new staff over the Christmas period, while a restaurant may anticipate fewer visitors in January so would purchase fewer ingredients.
It's also important for investors to consider seasonality when they analyse shares. If an investor doesn't consider seasonal gains and losses, they could choose to sell or buy shares based on the current level of business activity, rather than making an informed decision that takes the company’s entire financial year into account.
Some companies may need to make allowances for seasonality when they interpret or project financial data. This process is called seasonal adjustment.
Seasonal adjustment helps even out seasonal swings in financial data. By making seasonal adjustments, it's easier to get a clearer view of general trends in a company’s finances. This enables companies to predict overall sales levels across the entire accounting year and plan budgets accordingly.