Seasonality

What does it mean

Seasonality describes the changes in a borrower’s level of monthly revenue during the year that fluctuates on a recurring basis.  One easy example of a business with seasonality would be a construction company.  I am from Minnesota, and here, most construction companies operate from the late spring to late fall which is about 7 months, and then the activity in the business falls off considerably during the winter.  Due to this, the business begins the year with limited revenue, then revenue ramps up during the late spring, pleateaus at a high level during the summer and fall, and drops off quickly at the end of the fall to a low in the winter. 

Why does it matter

Being aware of the impact seasonality has on a business is important for two primary reasons: Impact on Financial Statements & Impact on Ability to Service their Debt

Impact on Financial Statements: Seasonality is a regular cycle, and being aware of this cycle as a banker is important in understanding the borrower’s business and interpreting their financial statements.  If we were to look at a Minnesota construction company’s income statement during the first quarter, we would likely be horrified because the business in all likelihood has an operating loss during that time.  Understanding the seasonality of the business helps to mitigate this loss.  In order to appropriately interpret their financial statements, it would be good to receive a comparative statement for the same time period in the prior year.  With that information, we would know how far along they were at this time last year, what the full 12 months of last year ultimately turned into, and how the year to date performance compares to the prior year.

Being aware of the impacts seasonality has on financial statements will ultimately save you from giving loans to bad businesses and also to not turn away good businesses.

Ability to Service Debt: As a banker, our primary goals is to give out loans that ultimately get repaid.  For a banker who receives a bi-weekly paycheck, it makes sense for our loan payments to mirror our income, and as a result, a monthly payment is probably appropriate.  For seasonal businesses, a set monthly payment may be super easy during their peak season, but difficult during their off-peak season.  In order to better match the payments to their income, a banker should consider offering alternative payment schedules to match their customer's revenue.  What is the end result of doing this? Payments are easier to collect because they loan payments mirror the businesses seasonality, and you have just provided that borrower a level of value not available from other banks (Win-Win).

Other Relevant Terms

• Capacity
• Income Statement
• Revenue
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