This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
A great many companies work under the handicap of extreme variations in the amount or the character of their business from one season to another. This was formerly true, for example, in the automobile business. During the early period of the popularity of pleasure vehicles the great mass of sales were made in the spring and early summer of each year; it is reported that in this industry the seasonal variation is being much reduced. Manufacturers of rubber goods, especially rubber shoes, find their sales concentrated at certain seasons; the same thing is true of manufacturers of agricultural implements, of sporting goods, and of many other products that will readily occur to every one. Manufacturers of textiles, of beet sugar, and of other products made from raw materials gathered from the soil are under the necessity of buying heavily at certain seasons of the year in order to secure the benefit of minimum prices. In all these lines of industry, either large stocks of finished products must be accumulated during the remainder of the year in order to meet the requirements of the busy season, or large stocks of raw materials must be purchased at a given season and gradually used up during the remainder of the year. In either case it is clear that much larger sums of money must be tied up in working assets during certain periods than during other periods of the year. This is a situation that involves unusual difficulties and greatly affects the amount of working capital that is required. The usual method is to secure a gradually increasing amount of bank loans as finished products are accumulated which are rapidly paid off during the sales season; or, if the other situation prevails, a large loan is effected during the buying season which is gradually paid off during the remainder of the year. Dependence upon bank loans exclusively, however, is unsafe, as many companies have discovered. Textile manufacturing companies have been peculiarly subject to failure because of their inability, owing to some unforeseen contingency, to meet the obligations held by their banks. Some years ago, when the so-called "Sugar Trust" desired to obtain control of an important beet sugar refinery, it is alleged to have obtained this result by secretly buying up all the short-time notes given by the sugar refinery during its purchasing season and then demanding prompt payment of these notes instead of granting the customary partial renewals. As a result, the prosperous refinery suddenly found itself confronted with the prospect of bankruptcy and was forced to surrender. Although it would not be economical for companies engaged in seasonal industries to keep themselves supplied with the amount of working capital that is required at the maximum period of each year, it is highly desirable and prudent that they should carry a much larger working capital than would be required during the off seasons. This is a part of their normal expense of doing business. Such companies sometimes find it advantageous to invest their surplus cash reserves during the off seasons in short-term securities.