Why Might Variable Expenses Change a
Great Deal at Different Times of Year?
Article Outline
Introduction
Why Might Variable Expenses Change a Great Deal at Different Times of Year?
Introduction
For companies across nearly every
industry, costs tend to fluctuate significantly over the course of a year.
While fixed expenses like rent, property taxes and insurance remain largely
steady, variable costs often rise and fall from month to month. There are a
multitude of reasons why variable expenses might change dramatically during
different seasons or times of year. Gaining a deep understanding of what drives
shifts in variable costs allows organizations to better anticipate, prepare for
and manage this seasonal variability.
Many factors can prompt
substantial changes in variable costs across the annual business cycle - from
volume of sales and production to facility usage and energy consumption. While
these swings can present challenges, strategies around forecasting, supply
chain management, flexible staffing, production scheduling and more can empower
companies to thrive regardless of seasonal shifts. By paying close attention to
cost behavior patterns and proactively implementing tactics to smooth out
seasonal highs and lows, businesses can optimize profitability and gain
competitive advantage.
Drivers of Seasonal Variability in Variable Costs
Variable costs, which change in
relation to production volume and sales revenue, can fluctuate for a wide
variety of reasons over the course of a year. Here are some of the major
factors that typically cause variable expenses to change significantly between
different seasons and time periods:
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Fluctuations in Sales
Volume and Revenue
One of the biggest drivers of
changes in variable costs for companies across industries is wide swings in
sales revenue and production output between peak seasons and slow periods. In
months or quarters with buoyant customer demand and sales volume, organizations
need to purchase more direct materials, take on temporary production labor, pay
higher utility bills and take other steps that drive up variable costs in order
to meet greater output requirements.
Conversely, during slower parts
of the year when sales decline, procurement spending, warehouse staffing, order
fulfillment expenses and other variable costs fall in line with lower
production needs. For example, a toy manufacturer will see a huge spike in
sales during the holiday shopping season, requiring ramped up spending on
plastic, packaging, hourly labor and shipping to support increased production
volume. Those variable expenses then drop off once peak demand passes.
For businesses with highly
seasonal sales cycles, these revenue-driven shifts in variable costs can be
dramatic. Production-related expenses could jump by 40% or more between peak
and trough seasons. Carefully tracking sales forecasts and factoring in the
corresponding variable cost impact allows organizations to better budget and resource
for busy periods. When sales volume dips, reducing production scheduling,
inventory levels and certain labor in line with demand direction helps minimize
costs. Overall, keeping variable expense ratios aligned with seasonal revenue
changes improves profitability across the full business cycle.
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Raw Material and Component
Cost Changes
Another factor that can prompt
seasonal swings in variable costs for companies is fluctuations in the prices
paid for direct raw materials, parts and components used in manufacturing and
service delivery. Commodities often exhibit cyclical pricing patterns tied to
supply and demand trends across the year. Agricultural products in particular
tend to vary in cost based on crop yields, weather disruptions and harvesting
schedules.
For example, packaged food brands
may pay higher prices for wheat, corn syrup or edible oils during periods when
inventory reserves are lower or growing conditions are unfavorable. Produce
used by restaurants and grocery stores fluctuates in cost based on individual
growing seasons and regional weather events. Even technology manufacturers can
experience some seasonal volatility in costs for components like memory chips
if disruptions occur during peak demand runs.
While purchasing teams often use
hedging, futures contracts and supplier agreements to smooth out some
short-term commodity price fluctuations, seasonal variability can still impact
budgets. Monitoring historical price cycles, identifying the key cost drivers
for major raw materials, and finding opportunities to time purchases around
lower-cost periods are some strategies that can help. Renegotiating supplier
contracts before seasonal cost spikes or Inventory pooling across locations to
avoid regional variability are other useful tactics. By understanding and
planning for raw material cost seasonsality, companies can better control this
source of variable expense change.
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Promotions, Advertising and
Marketing Expenses
Many businesses intentionally
take on extra marketing expenditures during peak selling periods in an effort
to maximize sales. Increased spending on promotions, advertising, events and
other initiatives aims to boost revenues during key seasons. However, these
additional marketing activities also inflate variable costs significantly for a
period of time.
For example, consumer product
brands often launch major television, digital and print advertising campaigns
leading up to back-to-school and holiday shopping seasons. Retailers schedule
promotional markdowns and special sales events during peak volume quarters.
SaaS companies stage user conferences and sponsored outings when customer
budgets open up. The spike in variable marketing costs aims to capture seasonal
sales momentum but must be accommodated by budgets.
When planning major marketing
campaigns, marketers should take both ideal timing for customer engagement and
internal expense planning into account. Concentrating promotions could have
exponential impact during peak demand, but resources must be allocated
accordingly. With forecasting and budget consciousness, seasonal ramp up in
marketing investment can deliver significant revenue lift while minimizing
profitability impact.
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Staffing Costs and Labor
Needs
Many organizations across sectors
see a spike in variable costs associated with staffing, labor and payroll
during peak seasons. Meeting higher sales volume, production schedules and
customer service demands often requires taking on extra workers either
temporarily or permanently. For manufacturing companies, seasonal hiring,
paying overtime and contracting temporary laborers prevents bottlenecks during
periods of peak activity.
Retailers and hospitality
businesses also routinely expand teams to handle holidays, summer vacation
crowds and other busy times for consumers. Even B2B firms may utilize
outsourced call center and sales reps to follow up on budgets at certain points
in the year. Depending on labor laws and union contracts, adding labor quickly
can be complex. Savvy resource planning focused on aligning labor utilization
with seasonal sales patterns allows for flexibility while controlling costs.
There are a variety of options
that provide staffing elasticity to meet seasonal peaks and valleys while
minimizing unnecessary overhead. Employing a core group of full-time employees
supplemented by larger numbers of temporary or seasonal workers is one
approach. Cross-training existing staff and deploying labor across different
roles dynamically based on seasonal workload is another strategy. Shared jobs,
contracted hours, staggered team shifts and flexible scheduling also help
balance labor costs over the variable sales cycle.
-
Facility Usage and
Maintenance Costs
For companies with
brick-and-mortar locations or production plants, variable costs associated with
running physical facilities often swing based on how much the space is utilized
at different times of year. Utilities like electricity, gas, water and HVAC
represent a variable cost correlated to occupancy rates and production volumes.
Facility maintenance, cleaning crews, landscaping and parking attendants also
may scale up or down seasonally.
Hotels, resorts and seasonal
attractions likely see the most extreme fluctuations in facility expenses based
on peak versus low occupancy and guest levels. But manufacturers, retailers, restaurants
and more all experience some fluctuations driven by customer traffic as well.
Performing major renovations and maintenance during closed periods, optimizing
energy usage around operating hours, and scheduling contractors strategically
around customer flows helps smooth out cost spikes.
Proactive planning around high
traffic periods allows facility costs to better align with business needs
seasonally without sacrificing customer experience. Keeping locations
well-maintained and supplied during peak months when usage is heavy, while
focusing on improvement projects when activity slows, creates better balance in
these variable facility expenses.
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Energy Usage and Weather
Conditions
Utility costs associated with
electricity, heating and cooling can demonstrate dramatic seasonal variability
for many companies. Energy consumption by its nature fluctuates based on
weather patterns and temperatures over the course of the year. Colder winters
drive up natural gas and heating oil usage and expenses exponentially. Hot
summers prompt heavier air conditioning and refrigeration loads.
Seasonal businesses feel this
impact the most acutely. Ski resorts may use minimal cooling but high levels of
snowmaking and snowmelt during winter months. Landscaping contractors consume
heavy amounts of gas and diesel fuel during growing seasons for work trucks and
equipment. Even typical office spaces often see power bills jump 20% or more
during periods of extreme cold or heat just to maintain workplace comfort.
Some ways to manage the
variability of energy costs seasonally include: investing in “smart”
programmable thermostats and timers on lighting/HVAC systems; performing
preventative maintenance on furnaces, chillers and compressors pre-season;
installing higher efficiency units ahead of peak loads; and taking advantage of
off-peak usage discounts from power companies. Optimization of energy usage can
significantly improve seasonal cost control.
Strategies for Managing Seasonal Variability
While shifts in variable costs
across the year can present major challenges, there are ways that companies can
plan for and manage seasonal swings more effectively. Implementing strategies
around forecasting, inventory management, flexible staffing, production
scheduling and supplier collaboration helps smooth out and stabilize expenses
across the business cycle.
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Creating Accurate Sales
Forecasts
Having an accurate and detailed
sales forecast provides critical visibility into expected seasonal changes,
allowing all other planning processes to align. Building forecasts based on
monthly or quarterly periods rather than annual averages better reflects
variability factors. Statistical forecasting models should look at seasonal
indexes, past sales cycles, external drivers, market trends and other data
points in predicting seasonal peaks and valleys.
Finance and ops teams can then
use sales forecasts to properly allocate resources, schedule production, and budget
fixed and variable expenses on a seasonal basis. Any mismatches between
forecast and actuals can then be quickly identified and addressed as needed
seasonally. Reliable forecasts are the foundation for successfully
accommodating variability.
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Planning Inventory and
Supply Orders
For manufacturers and
distributors especially, aligning inventory stocking levels and supply reorders
with seasonal sales projections avoids tying up excess working capital while
still meeting customer peaks. Building in lead times from suppliers and
factoring in any price variability across the year allows purchasing to
optimize order timing and costs.
Some strategies like just-in-time
ordering, buffer stock monitoring and dynamic reorder point formulas help
balance availability and working capital requirements through demand
fluctuations. Partnering with vendors on inventory visibility and flexible
terms can further help smooth out seasonal inventory needs cost-effectively.
Keeping inventory aligned to seasonal sales enables flexibility in production
and fulfillment.
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Utilizing Flexible Staffing
Approaches
As described earlier, using
seasonal and temporary laborers, contractors, and outsourced support in
addition to full-time staff allows companies to scale up or down more nimbly
during peak and trough seasons. Building in a buffer zone of on-call employees,
floaters across locations, cross-trained staff, and shared jobs provides
additional options for aligning labor utilization with seasonal sales and
operations workflow.
Workforce management groups can
analyze labor requirements seasonally and model options for smoothing out
staffing costs across the whole year. Maintaining a core of skilled full-timers
supplemented by a larger pool of flexible staff optimized total labor spend
while handling season peaks and valleys seamlessly.
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Scheduling Production
Efficiency
For manufacturers, optimizing
production scheduling around anticipated seasonal demand results in smoother
operations and cost control. Building downtime and maintenance periods into the
low season allows uninterrupted maximum output during forecasted spikes in
demand. Running extra shifts with overtime as needed accommodates peaks without
excess staffing.
Storing safety stock inventory
provides an additional buffer. Reducing production levels or temporary plant
shutdowns during slow seasons brings capacity in line with sales requirements.
This scheduling optimization around seasonal forecasts minimizes unnecessary
overhead. Efficient workflows then allow variable production costs to cleanly
align with revenue trends.
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Partnering with Suppliers
on Cost Controls
Strategic partnerships and
contracting approaches with vendors providing raw materials, components, and
services allows for collaboration on smoothing out seasonal cost and
availability issues. Long-term supply agreements can bake in some cost
variability protections through pricing transparency, escalators and
negotiation windows.
Suppliers also may be willing to
front-load inventory reserves or consignment stock ahead of predicted seasonal
spikes. Discounts for off-peak ordering or consolidated deliveries incentivize
better timing. Vendor managed inventory (VMI) provides real-time control and
flexibility. Customer-supplier collaboration and innovation around seasonal
planning provides mutual benefits.
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Optimizing Energy Use
Update loading dock and warehouse
lighting to LEDs with motion sensors and timers optimized for operating hours.
Use smart power strips that cut phantom load draws from unused equipment
automatically. Install programmable thermostats that lower temperatures during
closed hours in unused spaces, and raise during business hours only to needed
levels.
Perform seasonal maintenance like
HVAC coil cleaning before peak heating/cooling seasons to maximize efficiency.
Install plastic window film insulation to reduce heat loss in winter. Use
shades and awnings to control summer solar heat. Consider adding renewable
energy sources like solar panels to handle seasonal load balancing and peak
shaving cost-effectively. Optimizing energy usage around business operating
requirements provides major seasonal cost control and sustainability benefits.
Conclusion
In summary, variable costs
fluctuate across the fiscal year based on a number of factors - from seasonal
sales cycles to raw material prices, staffing requirements, facility usage, marketing
campaigns, energy demands and more. While shifts in variable expenses can
present challenges, awareness of cost behavior patterns in relation to key
business drivers provides the ability to smooth out these swings and budget
resources accordingly.
Taking a proactive and analytical
approach to forecasting sales cycles, planning inventory and labor needs,
optimizing production and energy usage, and collaborating with vendors enables
organizations to manage variability more effectively. Implementing strategies
and processes that align variable costs with seasonal revenue trends helps
ensure profitability, savings and competitive edge across the full annual
business cycle. With some planning and agility, businesses can confidently
navigate seasonal variability.
Frequently Asked Questions
Q: How can companies budget correctly for seasonal sales cycle shifts?
A: Budgeting based on monthly or
quarterly sales forecasts rather than an annual average provides better
alignment with anticipated revenue fluctuations. Factor seasonality metrics
into statistical forecast models. Plan variable expense budgets to grow and
decline corresponding to sales forecasts rather than fixed budgets. Build in
contingency buffers for peaks. Matching budgets and staffing plans to seasonal
volume projections allows for responsive planning.
Q: Why might overtime costs spike during peak seasons?
A: Meeting higher sales volume in
peak seasons often requires extended operating hours and overtime labor to
fulfill demand. Building in overtime buffers based on historical forecast
peaks, hiring temporary or seasonal staff, and cross-training teams for
flexibility helps minimize reliance on more expensive overtime during peaks.
Multi-shift schedules also help cover seasonal spikes cost-effectively.
Q: How can energy costs be optimized during extreme weather seasons?
A: Extreme cold winter and hot
summer weather drive seasonal spikes in heating and cooling bills. Smart
programmable thermostats turn down/up temperatures during closed hours.
Preventative maintenance improves furnace and AC efficiency pre-season. Window/door
insulation and shade structures reduce loss/gain. Solar panels supplement peak
loads cost-effectively. Off-peak usage discounts and lower nighttime rates can
also be leveraged in some regions to control costs.
Q: Why might marketing costs fluctuate seasonally for businesses?
A: Many companies strategically
increase marketing spend during peak sales seasons to maximize exposure and
capture more revenue through promotions and campaigns. While this inflates
costs short term, the payoff in sales lift offsets the temporary increase if
planned for properly in budgets. Timing major marketing pushes around seasonal
buying patterns can have exponential impact.
Q: How does production scheduling optimization help manage costs?
A: Aligning production timelines,
capacity and inventory planning with sales forecasts enables smoother cost
control and efficiency. Higher output with overtime in peak seasons, lower
production in slow seasons, and scheduled downtime for maintenance balances
costs across revenue cycles. Stored safety stock also helps buffer variability
peaks. Stable aligned scheduling minimizes waste and unnecessary overhead.
Q: What staffing models offer the most flexibility for seasonal businesses?
A: Maintaining a core group of
skilled full-time staff supplemented by larger numbers of temporary or seasonal
workers allows scaling up labor when needed for peaks and controlling costs in
slow periods. Cross-training and shared jobs provide additional flexibility.
Contracted hours, on-call staff pools and flexible shifts further align
staffing costs with fluctuating sales volumes.
Q: How can supply chain coordination help manage variable cost seasonality?
A: Strategic vendor partnerships
and contracting can provide flexibility around seasonal sales changes.
Long-term pricing agreements, periodic negotiations, visibility into inventory
levels, reserved stock buffers, just-in-time ordering, discounts on off-peak
deliveries and consignment programs help smooth out cost and demand variability.
Q: How can hospitality and resort businesses control seasonal utility
costs?
A: Many hospitality facilities
see major seasonal swings in utility costs based on variable occupancy and
guest levels across high versus low seasons. Smart thermostats that turn down
AC/heat in unoccupied rooms save energy. Programmable timers optimize lighting
costs. Preventative maintenance pre-season improves efficiency as usage
increases. Rate discounts for off-peak utility usage also help balance costs
all year.
Q: What are strategies for controlling seasonal inventory costs?
A: Aligning inventory reorder
points, safety stock levels, order lead times and supplier reorder calendars
with sales forecasts ensures adequate product availability during peaks without
excess stock-piling. Just-in-time ordering, dynamic buffer levels and supply
chain visibility enable better cost optimization across variable seasons.
Customer-supplier inventory collaboration is key for flexibility.
Q: How can businesses use facilities more efficiently across seasons?
A: Performing maintenance,
renovations and improvement projects during low-occupancy periods minimizes
costs and disruption. Scheduling housekeeping, landscaping, snow removal and
other services around peak utilization smooths spend. Optimizing energy usage
and selectively opening sections or amenities based on variable traffic also
provides savings. Planning around highs and lows optimizes costs.