Managing Fixed Costs in a Seasonal Business
Seasonal businesses make most of their money in a few short months, yet often pay expenses year-round. Some fixed costs can't be avoided, but advanced planning can help landscapers, restaurant owners and tourist businesses make the most of their off-season. To maximize profit, seasonal businesses should consider taking action to limit expenses in slower periods or increase year-round revenues.
Fixed vs. Variable Costs
Fixed costs do not change no matter how many customers a company serves. Equipment purchases are viewed as fixed because certain items are required to operate a business no matter if one unit or one million are manufactured. Insurance and rent related to long-term leases are other examples of fixed costs. Alternately, variable costs fluctuate along with revenues because they are generally not incurred unless sales are made. Materials costs and utilities costs may fall under the definition of variable costs. Hourly employee wages are also considered variable, while a salaried employee would be considered a fixed cost.
Managing Fixed Costs
During their slower periods, seasonal businesses may take action to limit both fixed and variable costs. The decision to shut down versus remain open in the off season is one which shouldn't be made lightly. Although rent expense must still be incurred, a shutdown decreases variable costs like supplies and utilities. Reviewing management reports from an online accounting system, such as a prior year income statement, helps small business owners decide whether or not to shut down.
Payroll is one variable cost seasonal service businesses may need to consider. Decreasing hourly staff saves costs and is an option that works well for businesses when employees are only seeking temporary work, such as a summer job. While trimming staff may be tempting, laying off employees in slow periods may also result in the permanent loss of valued employees who will not return when they're needed most. Shifting the duties of salaried employees during the off season to cover for hourly employees is one way to maximize your fixed cost investment.
Finding alternative revenue streams is essential for seasonal businesses wishing to operate year round. For instance, landscapers may choose to use trucks they've already purchases to offer snow removal services in the winter. In tourist towns, catering to local customers may be the best revenue draw during off season months. Product adaptation is another way to make money. Businesses with holiday themed merchandise, such as wreaths, may design a spring version or summer version of their decoration to sell at craft shows or online. Offering discounts is another way to bring in revenues and expand your customer base during slower seasons and take greater advantage of fixed costs.
To manage fixed costs efficiently, small business owners need to think outside the box and consider new ways of leveraging their employees and products. To gain the highest advantage from year-round costs, those operating seasonal businesses should never discount off season opportunities. A simple financial analysis can often point out ways to increase revenues or decrease costs.