Seasonality in Financial Models

  I have done many custom jobs and general templates where seasonality was a major factor in building the financial model. Including such logic helps to show what would happen over time to revenues, expenses and cash flows when accounting for big fluxes over the course of a year that are common to a given industry.

The first time I modeled seasonality was with the car wash financial model. This is pretty obvious as there are areas in the world where salt has to be put out on the roads and it gets all over everyone's cars. During this time, more people go to the car wash to wash the salt off so it doesn't cause as much damage. 

So, if you are trying to create a forecasting template that shows how a car wash can make money, you need to account for this potential impact. One way to mitigate seasonality fluctuations is to have membership options and that helps even out the cash flow, but there will still be seasonality impacts even so for something like a car wash tunnel / bay business.

When I build seasonality logic, the goal is to make it very flexible and adjustable over time. There are a ton of different ways this can be done and it can apply to nearly any industry. For example, maybe you have a sports application where you get most of your new customers at the start of the season of the NBA or NFL. That should be accounted for in the mobile app financial forecast in some way. Maybe the count of new customers added is defined by month or you define the % of total new customers expected to be added for the year that are added in each month, or you could have logic that raises ad spend in those months or raises traffic and the conversion rates apply accordingly. There are lots of options.

For the real estate industry, there are short-term rentals and hotels that really must have seasonality configurations. For those, I have also built in the ability to adjust for various pricing during different times of the year relative to a base and different occupancy rates during the year.

Here are some more templates that have specific seasonality logic built in:

More Reasons to Account for Seasonality in Financial Modeling

Accounting for seasonality in a financial model is important because many businesses and industries experience fluctuations in their performance throughout the year due to changing consumer behaviors, weather patterns, and other factors. Failing to account for seasonality can result in inaccurate financial forecasts, misleading performance metrics, and poor decision-making.

Here are some reasons why it's important to account for seasonality in a financial model:
  • Better forecasting: By understanding the seasonal patterns of a business or industry, financial models can be adjusted to reflect expected changes in revenue, expenses, and cash flow throughout the year. This can help businesses make more accurate forecasts, set realistic goals, and avoid unexpected shortfalls or surpluses.
  • Improved decision-making: Financial models that account for seasonality can help businesses make better decisions about inventory management, staffing, marketing campaigns, and other operational factors. For example, if a business knows that its sales typically increase during the holiday season, it can plan accordingly and avoid overstocking inventory or understaffing during the busiest time of the year.
  • Enhanced performance metrics: By adjusting financial metrics to account for seasonality, businesses can get a more accurate picture of their performance over time. For example, comparing sales figures year-over-year without accounting for seasonality can lead to misleading conclusions. By adjusting for seasonality, businesses can identify trends and make more informed decisions based on actual performance.
Article found in Accounting and Finance.