Forecasting and Financial risks: A Guide for Businesses Experiencing Seasonal Demand

Businesses typically have high and low seasons. Knowing when these seasons are is one thing; being prepared for them is another. Months before your peak season begins, you need to have the funds to procure your goods. This can drain your finances, especially considering the fact that more than 75% of SMEs surveyed by FSMK said they don’t have the privilege to pay their suppliers on credit terms. Aside from preparing inventory and cash, you also need to have sales, marketing, and staffing strategies in place for busy periods.

While it’s difficult for SMEs to be prepared for every high and low season, you can make the best of your plans through seasonal demand forecasting.

Demand forecasting is making calculated predictions about future demands for services or products, allowing you to allocate resources in advance. You make these predictions based on historical data—the demand and supply changes you faced in previous peak seasons, how much revenue you made, and how much you spent to procure, produce, and sell your goods. Data-driven demand forecasting is a critical practice if you want to optimise your inventory, capitalise on demand, and generate revenue that can carry the business through times of lower demand.

Benefits of seasonal demand forecasting

For businesses that experience seasonal fluctuations, demand forecasting is a non-negotiable practice. That’s the case for Funding Societies’ customer Toko Hidup Berkah, an Indonesian company that sells covers for cars and motorcycles. It is especially during the rainy seasons that demand for these products surges.

“These products [are not] purchased at any time. When the rainy season arrives, vehicle owners who don’t have a garage will need to protect their vehicles so they don’t get caught in the rain. So during the rainy season, sales will increase significantly,” says Achmad Mustofa, owner of Toko Hidup Berkah.

Pak Achmad uses demand forecasting to balance production with anticipated demand. He considers various aspects including operational costs, target sales, and typical peak periods.

How can you do as Pak Achmad does, and harness the power of seasonal demand forecasting for your business?

1. Understand your business cycle

Before you can forecast effectively, you need a clear understanding of your business’ seasonal peaks and troughs. You can do this by analysing sales and operations data from previous years to identify patterns and cycles. The longer you’ve been collecting data, the better—this helps identify long-term seasonal trends.

If you don’t have this data in one place, you can input it in a spreadsheet or a data software that has predictive analytics capabilities. Your budget and data wrangling skills are the biggest determinant here. If you’re Excel-savvy, you could analyse the data yourself, identify past trends, create visualisations, and make an educated prediction. You can use forecasting templates like this one from Shopify so you don’t have to start from scratch. Alternatively, try a finance software like Odoo, an e-commerce demand planning tool like Locad, or a resource planning tool like Sage.

Yadi Karyadi of small business Dapoer Dini, a company that sells Muslim clothing and traditional sweets, says the company experiences most of their demand around Eid. Months before the holy season, they anticipate seasonal demand. They also prepare their workforce to ensure schedules and staff are adequate for catering to the surge in demand.

Businesses like Toko Hidup Berah also plan for the months when sales slow down. “When we have excess stock, we can save it to sell during low season through a promo system. And when there is a shortage of stock, the target product is transferred to more stock,” says Pak Achmad.

2. Use a relevant analytical framework 

Data becomes useful information when you add context to your facts. When it comes to seasonal demand forecasting, you can add context through several ways:

Clustering

Find out if peaks and lows apply to one or all of your customer segments, or other clusters like product categories and markets. Customer segmentation is typically based on demographics (e.g., age), geography (e.g., city or country), psychographics (e.g., interests), and behaviour (e.g., where a customer shops and how much they typically spend).

For example, if you observe an increase in sales in December, ask questions like:

• What are the common characteristics of the customers who had the highest increase in shopping? It could be customers in their 20s, or those who have accounts on your site as opposed to  those who check out as guests, or those with the highest customer lifetime value.
• On which channels did the increase take place? Did online purchases increase more than brick-and-mortar ones?
• Which product categories typically see a surge in sales every December?

Insights from such analyses will help you decide which products to stock up on and how to promote them. This way, you spend on the customer, product, and channel segments that have historically driven more sales during high season.

Time series

Time-series analysis involves observing how revenue, price of goods, supply, and demand change over time to spot regular patterns of peaks and lows. When you plot these data points in a line or bar graph, you can visually spot growth and decline trends.

Time-series analysis helps you answer questions like:

• When does the cost of goods typically increase in a year?
• Does my debt go up right before peak season, and does it go down right after?
• Did one logistics service provider get expensive after years of minimal price increases?
• What time of the year contributes to the highest sales, revenues, and profits?

By finding the answers to these questions, you can decide whether you need to ask for more flexible payment terms with suppliers, support your budget through seasonal business financing, or negotiate a preferential logistics rate based on your predicted sales volume.

For instance, Phùng Thị Hiền Thắng, Business Owner, Thai Nguyen International Hospital Joint Stock Company in Vietnam, observed that their business typically needs more capital during the beginning and end of the year. “Around the end of December to the beginning of February, our company needs the capital to simultaneously achieve the previous year’s goal to implement business activities for the coming year,” he says.

Supplement with qualitative data

Interview your suppliers and customers to find out the nuances and bigger picture behind the data. For example, they can tell you:

• Why they’ve increased the cost of goods
• How much volume you need to ship to get a better shipping rate
• Why they buy your products at a certain time of the year
• How they perceive your brand throughout the year, not just in peak periods 

Use this information to explain your data-driven findings and inform your strategy. For instance, if a supplier raised the cost of goods because electricity has become much more expensive in their country, you might want to source for a supplier in another country. If your research reveals that customers only see your brand as relevant for certain holidays, review your product positioning and marketing messages to appeal to customers during off-peak seasons too. Additionally, if demand has suddenly dropped from a certain market, find out if a local competitor, regulation, or cultural factor has caused the decline.

3. Account for outliers

Keep an eye out for outliers in your data set. Covid-19, for instance, was a major deviation from the norm—even during festive seasons, F&B outlets saw dampened traffic and sales due to shelter-in-place policies. A rare event like a concert that attracts thousands of people from overseas can also cause an unusual and temporary surge in consumer demand.

But don’t dismiss an outlier right away. Rather, investigate its surrounding circumstances, and determine whether such an event is likely to occur again this year. For instance, Taylor Swift’s The Eras Tour will come to Singapore once, maybe twice.The resulting consumer behaviour—like a massive spike in hotel bookings in March and high demand for fun and flashy concert outfits—is tied to the event. On the contrary, some new consumer habits driven by the pandemic, like online grocery delivery, may eventually become the new normal.

Future-proof your business with demand forecasting

By making seasonal demand forecasting a practice, you gain an additional benefit—you have data and reports on hand whenever you need to make a business case. Demand forecasting might require you to take a loan, negotiate with a supplier, or woo an investor. Our Digital Finance and Payment Behaviours Report 2023 found that SMEs in Southeast Asia typically apply for financing during the festive season of December to February.

When you find yourself in similar scenarios, you’ll have the information you need to explain your historical performance and your business expectations for the year. 

Need help with funding your business this busy season? Take this quiz to find out which financing option suits your needs.

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Disclaimer: The information provided to you in this blog post is intended only for general information purposes only and does not constitute legal or other professional advice on any subject matter. The materials and the information provided are not intended to be and do not constitute an advertisement or solicitation. In no event will Funding Societies be liable to any party for any direct, indirect, incidental, special, consequential or punitive damages for use of such information by you or any unauthorised third party.