Managers need to understand how their business is doing, but normal seasonal variations make this harder. Here's a basic primer that every business leader needs to understand before looking at data about sales, operations or finance.
The Christmas season is a great example of seasonality: it occurs regularly and has a colossal impact on many companies, as I pointed out in my recent article How Big Is Christmas For retail? That article showed that the category of “Sporting goods, hobbies and music stores” had the biggest impact from Christmas of any retail sector. Let's look at that in more detail.
The chart shows a spike in sales every December. There is also an uptick every August and a low spot every February. The seasonally adjusted line is much more stable. In December 2011, the Christmas spike was not as strong as it usually is, and the red line shows that adjusted for normal seasonality, it was a poor month. That would be hard to see looking at the raw data alone.
Seasonality occurs for many reasons. Holidays are usually good times for merchants, who get sales boosts at Easter as well as the major three-day holiday weekends.
The climate fluctuations through the year give seasonality its name. Everyone knows which months are best for selling snow blowers, seeds, swimsuits and rakes.
The government drives some seasonal patterns, as any accountant laboring to meet the April 15 tax filing deadline knows. The school year drives plenty of activity, too.
Financial reporting deadlines may also drive behavior. Mutual funds may engage in “window dressing,” in which they try to make their stock holdings look good for the December 31 report. Some companies have been known to push sales at the end of the quarter to show Wall Street good revenues.
Some seasonal patterns take place over multi-year periods. To look at federal government employment, the decennial census must be considered. Television advertising revenues are affected by elections every two year, and soccer's World Cup occurs once every four years, bringing productivity to a standstill in much of the world.
