Seasonality - What is seasonality?
Seasonality is a recurring and predictable change in the level of business activity, repeating over a one-year period.
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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 in some businesses compared to others.
Seasonality can be caused by several different factors, including: 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 may do the majority of their work during the summer, whilst accountants may be busiest towards the year end when businesses need to close their books.
Because seasons can have a big impact on a company's level of business activity, it is important to understand the effects of seasonality. By understanding seasonality, company directors can schedule employee’s shift patterns and manage their inventories to fit with seasonal demand.
For example, a commercial retailer may 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 is also important for investors to consider seasonality when they are analysing shares. If an investor does not 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 which considers the company’s entire financial year.
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 is 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 make budgets accordingly.