Question

Need help with mainly parts b and c.

For part A, im guessing that the revenue would be recognized over the period of the waterparks busy season (June-September) since its a seasonal business and that's when they will earn a majority of their revenue. could someone help me with the codification for seasonal businesses?

QUESTION

Stop and think. In this example, you’ll be asked to stop and think about an issue, then to search the Codification for applicable guidance.

a. Stop and think. Your company sells seasons passes to a waterpark that it owns. The passes are good from June 1 to September 30 of a given year. The company must determine the appropriate pattern of recognition for recording this revenue. What does your instinct tell you?

b. Now, perform research within the Codification to find guidance on this issue. How does the authoritative guidance describe this issue?

c. Finally, consider: Was your instinct consistent with the guidance for this issue? How did this instinct help you evaluate the guidance you found?

Answer 1

Identify and plan for the cyclical nature of your business

For many in a seasonal business, it’s not uncommon for revenue to ebb and flow throughout the year. In my business, we would see a significant influx of customers in the spring and again at the end of the year. Knowing this made it possible to anticipate when we would have extra cash that could be devoted to capital improvements, additional inventory, or a nest egg to help us bridge the first two to three months of every year when business was very slow. Because we could recognize this cycle, it made it much easier to set aside the extra capital we generated during the particularly busy times.

Anticipating these cycles, in addition to avoiding the temptation to spend more capital when it’s more abundant, can be particularly difficult for new businesses that haven’t experienced more than a season or two (one healthy season does not a cycle—or a trend— make), but investing time to research trends in your particular industry will help you evaluate how your business is performing compared to similar businesses within your industry.

Create and keep to a budget

Once you’ve identified the cycles in your business, the next step is to create a budget to help you maintain operations all year long. I have a friend who is part of a fishing lodge in Alaska every year. His company earns enough during the “season” to close the doors and (with the exception of making appointments for next year) is able to lay off his staff throughout the winter months. Fortunately, they all make enough money during the season that his employees return year after year. Nevertheless, many businesses continue to operate all year long and revenue generated during the busy season needs to help them bridge the slower seasons.

It can be tempting to put the slow season out of your mind when facing “customers-a-plenty,” but establishing a budget will help ensure you have set aside enough capital to keep the doors open and your employees paid during the slow times.

Are there alternate income streams available?

It’s a pretty common opinion that looking for additional sources of income during the slow season is an important strategy for managing the seasonal nature of many businesses, but it could also make sense to focus energy on ways to increase the average invoice size during the busy season to do the same thing. Often, there are related products or services you can offer to your current customers that will help generate additional revenue without the need for a lot of new staff or expense.

My grandfather used to say; “You need to make hay when the hay is ready.” Successful portrait photographers, for example, offer picture frames, framing services, and photo albums, to their customers to generate a little more revenue from everyone who comes in the door during their busy season. Are there additional ways you can increase the average invoice size with related products or services during your busy season?

Create a referral program

After a recent haircut, the stylist gave me a card offering myself, and anyone I referred to her, a free haircut. I’ve discovered that most people enjoy helping others and are willing to refer their friends to people they like.

Although my wife and I have lived in the same home for nearly 35 years (meaning we haven’t used a realtor in all that time), she knows a realtor she really likes and recommends him to her friends. He does a good job and she feels comfortable recommending him. Occasionally, he’ll send her a gift certificate to one of her favorite restaurants to say, “Thank you,” for the referrals. The thank you gift is not why she makes the referral (it’s the positive feedback she gets from her friends), but it does remind her that he’s around and is one tactic for institutionalizing the referral process.

Much like the card my stylist gave me at my last haircut, which gives a special offer to whomever I recommend (as well as a nice thank you to me), it makes her more inclined to pass along the referral to one of her friends. Both my wife’s realtor friend and my stylist have made asking for a referral part of the way they do business during the busy times. If such a program could extend your busy season, even for only a week or two, it could be a good tactic to help your business stay profitable every month of the year.

Consider a business line of credit

I’m not of the opinion that every business challenge can be solved with additional capital, but I do believe that a small business loan or line of credit can be a great tool to fuel growth or fund other ROI-generating initiatives. If your business is busy during the summer months, the flexibility of a business line of credit can also help you take advantage of opportunities to fuel growth during the busy months that could continue to generate revenue during a slower season.

To qualify for a line of credit, most lenders are looking for healthy businesses, with a positive track record of successfully managing credit. Many lenders consider the increased flexibility of a business credit line higher-risk financing than a more traditional term loan because the business is borrowing in the future based upon their creditworthiness today. So, a new business with only a year or two under their belt with a weak business credit profile or a business owner with a low personal credit score will likely not qualify.

That being said, seasonal businesses that meet the criteria and maintain enough cash flow to make the regular periodic payments during the slow season can successfully use the flexibility of a line of credit to prepare, or ramp up, for an upcoming busy season or take advantage of other profit-generating opportunities.

It’s not uncommon to think about the extra things you can do during the slow times to keep a seasonal business profitable all year, but these five suggestions might help you maximize your busiest seasons to distribute profits throughout the year and successfully manage your business’ finances.