16: Financial Planningto do so by regulation. In Australia, most listed companies are only required to publish financial reports
every six months. Resource-related companies are also required to publish quarterly cash flow details,
but are not required to publish quarterly balance sheet or income statement information. In the US,
listed companies are required to file their financial returns on a quarterly basis, so financial data from US
companies can be more informative when trying to assess the impact of short-term financial planning.
Because sales volume tends to fluctuate around a long-term upward trend, we expect to observe the
same pattern when we examine a company’s total assets over time. As sales volume grows, so does the
company’s need for current and fixed assets. During the year, a company’s investment in current assets
will tend to rise and fall with sales. This seasonal pattern creates temporary cash surpluses and deficits
that the company must manage. In the remainder of this section, we use data for Hershey Foods (in the
US) to demonstrate alternative financing strategies.
Hershey Foods Quarterly Sales and Total Current Assets
Panel A of Figure 16.2 plots quarterly sales figures for the Hershey Company from 1997 to the second
quarter of 2015. Hershey’s fiscal year matches the calendar year, so its quarterly income statements
report sales for quarters ending in March, June, September and December each year. For Hershey,
sales usually peak in the third or fourth quarter of each year. Sales troughs typically occur in the second
quarter. Panel A of Figure 16.2 also reveals a gradual upward trend in Hershey sales from 1997 to 1999.
That growth trend levelled off from 2000 to 2003 with the US economic recession; it then resumed
growth from 2004 to 2006, before levelling off again beginning in 2007.
Panel B of Figure 16.2 plots Hershey’s quarterly total current assets over the same period. You
can see that the patterns closely match those in Panel A. Hershey’s total current assets show the same
seasonal pattern (with a lag of one quarter) and the same upward trend of the company’s sales. Hershey
builds current assets, mostly inventory and receivables, during the third and fourth quarters of each year,
and it draws down these items during the first and second quarters.
Because Hershey’s total current assets fluctuate around a long-term upward trend, we can think of
the company’s current assets as containing both a temporary and a permanent component. The temporary
component reflects the differences between the seasonal peaks and troughs of Hershey’s business. The
permanent component represents the sizeable investment in current assets that Hershey maintains even
during the quarters when business is slow.
Hershey’s fixed assets (not shown in the figure) do not exhibit the seasonal pattern of sales and
current assets. However, its fixed assets do follow the long-term upward trend, essentially following the
long-term growth in Hershey’s sales.
Financing Strategies
What financing strategies might Hershey employ to fund both the long-term trend and the seasonal
fluctuations in its total current assets? First, Hershey might adopt a conservative strategy, one in which the
company makes sure it has enough long-term financing to cover its permanent and seasonal investments
in current assets. For example, Hershey might issue long-term bonds to generate enough cash to cover
all its cash needs for several years. This strategy is represented graphically by the blue line in Panel B
of Figure 16.2. By using this strategy, Hershey has a cash surplus for much of the year, drawing down
that surplus only when total current assets reach their peak during the third and fourth quarters each
year. Hershey will invest its excess cash balances in marketable securities. We describe this strategy as
conservative, because it minimises the risk that Hershey will experience a liquidity crisis during peak
quarters. However, keep in mind that large investments in cash and marketable securities are not likely
conservative strategy
Financing strategy in which
a company makes sure
that it has enough long-
term financing to cover its
permanent investments in
fixed and current assets
as well as the additional
seasonal investments in
current assets that it makes
during the various quarters
each year