"Seasonality is a pattern
that more or less repeats itself each year,
although this pattern may drift or change in amplitude over time."
Ted Jaditz, Bureau of Labor Statistics
Introduction
Short-term Borrowing
Factor Causing
Why Bother?
Modeling
When to Bother
Lemonade Stand
Most companies experience seasonal cycles of business activity during the year. These cycles involve some periods when sales are weak and other periods when sales are strong. There are periods when expenditures are greater and periods when expenditures are smaller. Seasonal cycles require careful planning of cash inflows, cash outflows, borrowing, and investing.
For a lemonade stand, cash receipts from sales are highest in the late spring, summer and fall. Sales are low or nonexistent in the winter months. Expenditures are usually higher during the peak months due to high cost of goods sold. There are still expendirtures during the slow periods, such as rent and utilities, that need to be paid. During the late summer, fall and winter the business has excess cash on hand that it needs to invest in a way that will yield a return. During the late spring and summer, the business needs to plan for short-term borrowing to tide it over until cash receipts pick up later in the year.
Some firms may have a predictable cash flow pattern. They have surplus cash flows during part of the year and deficit cash flows the rest of the year. A firm with seasonal cycles may buy marketable securities when surplus cash flows occur and sell these securities when a deficit occurs. Firms frequently accumulate temporary investments in marketable securities to provide the cash for a plant construction, dividend payment, or other large expenditures.
If forecasted cash balance is insufficient to cover day-to-day operations, you will need to find additional finance. The principal sources of borrowed capital for new and young businesses are trade credit, commercial banks, finance companies, factors, and leasing companies. Short-term unsecured financing is frequently available to cover seasonal working capital needs for periods of less than one year. Commercial banks are the primary source of debt capital for existing small and medium-sized businesses. Most of the loans made by commercial banks are for one year of less and the loans are retired by systematic payments over the life of the loan(Timmons).
Another issue that comes with seasonality is seasonal dating. Seasonal dating refers to the credit terms that encourage the buyer of seasonal product to take delivery before the peak sales period and defer payment until after the peak sales period. The supplier, thus, avoids carrying excess inventory and the associated carrying costs. One should accept seasonal dating if warehousing costs plus the required return on investment in inventory exceeds the required return on additional receivables. Both parties can take advantage of this practice if the numbers are right(Kuhlemeyer).
THE 3 BASIC FACTORS CAUSING SEASONALITY:
WEATHER
CALENDAR EVENTS
SOCIAL CONVENTIONS
There are three basic exogenous factors give rise to seasonality in economic data. The first is the weather conditions. Temperature, hours of daylight, and the liklihood of severe storms are all factors that could effect business. Summertime businesses are most affected by weather conditions. Cold temperatures and rain can severely decrease sales for such seasonal businesses as a lemonade stand
The second factor includes predictable and regular calendar events. Days such as Christmas, Independence Day and tax day all effect production and consumption decisions. Retail stores often set-up operations to revolve around holidays. The period before Christmas is often a retailer's most important sales period of the year.
Finally social conventions have an impact on the timing of certain activities. Business gathering and meetings affect the business of hotels and convention centers.
The study of seasonality has been tied to the study of the business cycles. Business cycles being the pattern of boom and bust that is apparent in economic data over long periods, particularly in the measures of output. A seasonal pattern can complicate inferences about the business cycle.
Three common filters for modeling seasonality(Jaditz):
1. Deterministic seasonal process: This assumes that the seasonal component has purely deterministic explanation that does not vary in any shape.
2. A stationary seasonal process: This is generated by stationary auto-regression. It corresponds to a seasonal process for which the magnitude of the seasonal effects vary slowly through the sample.
3. Seasonal integrated process: This model has properties that are quite different from the properties of the other two models. It exhibits a "long memory" property, in which a single shock may permanently affect the observed seasonal pattern.
When is seasonal adjustment appropriate?
What one should look for when deciding whether to make a seasonal adjustment(Jaditz):
1. Empirical findings may be suspect if seasonality is a factor but is ignored. Adjustments need to be made in financial figures to show for seasonality. Only looking at the figures of the peak periods will lead to an overestimate of the business's success.
2. If seasonality is not present, and we attempt to filter it out anyway, we have additional problems. Accounting for seasonality when there is none can inflate numbers.
3. There is no one best model for seasonality, and taking a specific approach to modeling the seasonal component involves making assumptions about the characteristics of the underlying process that must be carefully thought out and defended.
The lemonade stand in "Open for Business" is affected by seasonality factors. The business will only be able to stay open for part of the year depending on the climate in the area. People are only going to purchase lemonade when the weather is warm. Cold weather or rain will force the operation to shut down. Certain holidays, like the 4th of July and town fairs, could help boost sales. The lemonade stand will experience high sales during the late spring, summer and early fall. Sales will be non-existent in the winter months. In order to be successful the kids need to take advantage of the hot, sunny days and summer holidays.