Understand how Seasonality Affect Your Business
The profitability of your business is a function of two things, namely, Revenue and Cost. Revenue is the revenue is the amount of money that your company actually receives from its sales of product and/or services. Cost is money that you have to pay for production of the products and services.
Your revenue is directly affected by the seasonality of your business i.e. in peak period your revenue is high whereas in low period when the volumes are low, the revenues will fall. The Graph below shows the effect of seasonality on your business:
Assuming that you business that a fixed cost of operations (i.e. fixed number of staff members with other fixed expenses like infrastructure etc.), The area of Triangle â€œAâ€ represents the profits that your business makes as it gains steady volume while being able to keep the cost low. Area of Triangle â€œBâ€ represents the losses that your business may have to incur while keeping the costs same but as revenue falls.
Now there are several variations here:
Area of Triangle â€œBâ€ is less than Area of Triangle â€œAâ€
Here your company faces fewer losses than the profits that it has made in the previous cycle. Your profitability is determined by Total Profits â€“ Total losses which effectively means that the downward cycle negatively affects your business but you are still profitable.
This is case with managed companies or the companiesÂ that sell highly profitable products.
Area of Triangle â€œBâ€ is equal to the Area of Triangle â€œAâ€
Here your company faces same amount of losses as the profits it has made in the previous cycle. Here your Total profits = Total losses. Thus, although your business is not loss making but your operations are risky and growth prospects are minimal.Â
This is the scenario at Small companies which get infrequent flow of projects and assignments and lack the management expertise to plan ahead. In downtime they consume whatever profit was generated in a high period.
Area of Triangle â€œBâ€ is more than Area of Triangle â€œAâ€
Here your company is loss making at the end even though you have generated positive sales. Here your Total Profits is less than Your Total Losses.
This is the scenario at start-ups and individual freelancers which do not have any reserve and they end of being unprofitable and have to close down their operations.Â
Next: How companies can manage this sesonality with outsoucing?
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