Lessons in Corporate Finance

CHAPTER 4 The Impact of Seasonality on a Firm’s Funding (PIPES-C)

This chapter will reinforce and extend our use of the finance tools we introduced in the previous two chapters. We will do so by examining the effect of seasonality on a firm’s financials. As a consequence, our evaluation interval will not be year to year, but rather month to month.

It is common to use annual reports when analyzing a firm’s financials. The annual Income Statement represents the previous 12 months of activity, and the Balance Sheet reflects financial values at the fiscal year-end. Annual Income Statements and Balance Sheets provide a reasonable starting point to analyze a firm. In addition, they are sufficient if the firm’s sales, as well as assets and liabilities, are fairly constant throughout the year (as we assumed in the last chapter for PIPES). However, many firms have large variations in their sales, assets, and liabilities during the year due to seasonality. For example, the Christmas gift season is typically the largest for retailers, and thus sales are higher during this period while inventory levels are largest just prior and lowest just after. These, of course, have a cascading impact on receivables, payables, bank loans, and so on. If PIPES was located in the Midwest, and a large portion of sales was dependent on contractors, there would also probably be seasonality with more building taking place during the summer months.

To reinforce our financial tools and to illustrate the effect ...