I was recently reading an article by one of these entrepreneurial guru type persons. It was all about how his business had suffered due to the adverse weather conditions, and as such, his business was potentially going to be hit for several hundred thousand pounds of revenue and profit.
His business is an outdoor activity company and it has one of those very difficult business models: Seasonal Trends!
Business is tough enough every month. Add to this a seasonal fluctuation, and if you get it wrong, it could be curtains. I tried to offer some advice, but I am not sure it got through.
So why would I be in a position to offer any advice, what would I know about seasonality?
Going back to my business in 2005 that’s one of the problems I had then and the million-dollar question I had to answer.
Before this though; in my early career I was involved in retail – and at that time in one of the fastest moving sectors – computer console games.
Technically, I was employed as a software support geek for a small retail chain focused on the small / home office market, but as Christmas drew closer all of my focus turned to computer games.
I am sure you have all seen that film where the toy/game of the decade has been launched before Christmas, they are in short supply and every parent knows that if it is not in Jonny or Jenny’s stocking then Christmas will be HELL….
Well, I lived on the other side of that nightmare. For us, it was heaven as these games would fly out of the door. Fifty-pound notes would be thrust into our hands as parents fought (sometimes literally) over the latest Sega or Nintendo hit of the year. We could ship thousands over that Christmas period.
Let me give you the maths. Average branch revenue – seven hundred and fifty thousand per annum. In the week before Christmas, we could achieve up to 20% of that in sales and the Saturday before Christmas around 30% of that. Simply put around 6% of our turnover was in ONE day.
Now for us, that was OK as it was product-based, so we just sold lots and lots. But what if we were a business where our Business Model was time for money? And what if we had a bad Christmas OR what, if like our entrepreneur above, we had a business that relied on the Great British weather and that was unkind to us – what could we then do?
This is the problem I had back in 2005 where the business I ran repaired accident damaged cars. Now, initially you would not think of this as a seasonal business, but it is as it’s reliant not only on the weather but also on the light. It is also a labour-intensive business as cars do not repair themselves (as yet!).
The dreaded dates were the last Sunday in March and October because the clocks changed. At that point, our business changed dramatically. See, during the summer months the weathers better and it’s lighter driving to and from work. Plus, people are on holiday resulting in a lot fewer car accidents.
Now, this is all very good as nobody wants anybody hurt in an accident. But when your whole Business Model is managing hundreds of thousands of car accidents for insurance companies, this can cause a problem. Come October it’s dark, wet and potentially icy. People have forgotten how to drive in these conditions, and so that Monday after the clocks go back it’s suddenly dark driving home. A recipe for disaster.
Let’s break down why:
- A thirteen-billion-pound industry with swings of around 11% means requirements for more people like engineers, claims handlers, contact centre agents etc during the wet, cold and dark months compared to the light, dry summer months.
- More parts and paint are also needed from the relevant manufacturers.
Like the Christmas rush, businesses in these sectors are of course prepared for these changes. BUT – and it is a big BUT – what happens if there is a POOR Christmas period OR the weather does not follow the predicted year on year trends? We could lose our business or go very close to the mark.
Back in 2005 I was not prepared to let that happen. It’s also really hard work finding extra staff during the busy months and coping with the extra demand, let alone cash flow issues.
I followed the Joseph and the Amazing Technicolour Dreamcoat School of Management:
‘Seven years of bumper crops are on their way
Years of plenty, endless wheat and tons of hay
Your farms will boom, there won’t be room
To store the surplus food you grow
After that, the future doesn’t look so bright
Egypt’s luck will change completely overnight
And famine’s hand will stalk the land’
Storing cash for the quieter months, rather than the wheat and hay.
But I always worried that we may not get a bumper crop / period and then what would happen? As a CEO, my job was to plan for the worst.
Today, out of all my current clients, I reckon around 55% run a seasonal business. At a certain income level, it is possible to have momentum and get through the ‘quieter’ months, but below seven figures it becomes really difficult to carry overheads and staff for the less busy months and see that cash get lower and lower.
Is there an answer? Well there was for us, and maybe is for you. Regardless of whether you run a seasonal business or not the answer is three little words: Gross Margin Value.
Every business has set costs they need to fund to deliver sales. These are generally referred to as fixed costs. They form the breakeven point of your business.
As an example, if my business has fixed costs of 30k per month, as long as I sell 30k of sales (after my cost of sales has been deducted) I will break even.
Think about it this way – if your business has six great months BUT also six bad months then the six-great pay for the six worse. Putting this into figures (after the cost of sales deduction):
- Six months of great business could be 40k per month.
- Six months of poor sales could be 20k, resulting in a business achieving 360k.
- Now if that business had fixed costs of 30k per month it would break even, the great covering the poor.
- But what if the poor months could actually break even – not make a profit but break even – hit that gross margin value? That would then result in all the bumper months turning into profit.
This is the philosophy that I focused on. Getting the most out of the bumper times but limiting the liability on the quieter months.
In my business when we focused on that, the answer was obvious. What vehicles comes out in the Summer (our quieter times)? Motorbikes! Yes, we set up an accident repair services for motorbikes, caravans, campervans. Not to make a profit but to actually get it to break even. And to Keep the staff we needed for the busy period and turn the bumper months into exactly that.
So, if you have a few quieter days, weeks, months in the year what can you do to breakeven during those periods and release the bumper times into profit?
Work out your gross margin value and rev those engines.