Controlling Assets—Matching Sales and Production

In most companies, fixed assets increase gradually as production capacity expands and old
equipment is replaced. On the other hand, current assets vary in the short term,
depending on the relationship between production and sales. If production exceeds sales,
inventory accumulates. If sales increase faster than production, inventory decreases and
accounts receivable increase. In short, fixed assets grow slowly, while current assets
fluctuate based on production and sales.

In the cash budgeting process, some companies use level production methods to optimize
labor and equipment efficiency and reduce costs. This leads to fluctuations in current
assets when sales and production do not match. Other companies seek to equalize sales
and production in the short term to avoid large seasonal changes in their current assets.
Seasonal industries, such as manufacturing, retail, electricity, and natural gas, experience
variations in demand due to seasonal factors, such as air conditioning in the summer or
heating in the winter. An example of a company with seasonal demand is Briggs & Stratton
Corporation in Wisconsin.

Briggs & Stratton is the leading manufacturer of air-cooled gasoline engines ranging from
3.5 to 25 horsepower. Their engines are used in lawnmowers, pressure washers,
generators and other products. Approximately 30% of its sales are made in the
international market. The company experiences seasonality in its sales, with a peak in the
third quarter (January to March) due to demand for garden equipment in spring and
summer. Most sales are made early in the year to allow equipment production before the
peak season.

In the case of Briggs & Stratton, the first quarter of the year always shows negative
earnings per share as production costs exceed revenue, possibly due to inventory building.
Most of the company's profits come from the third quarter, which is its peak sales period.
This is exemplified by earnings of $57 million in 2016 and $27 million in 2017, all in the
third quarter. The seasonal nature of sales can be compounded by a buildup of end-user
inventory and a drop in orders for the upcoming season.

On the other hand, retail companies like Target and Macy's also have seasonal sales
patterns. Although they do not store large amounts of inventory, they depend on suppliers
who must make decisions about level or seasonal production. The fourth quarter is crucial
for retailers as it accounts for more than half of their profits and ties into the holiday
season. Inventory not sold during Christmas is usually put up for sale in January.

Both Target and Macy's experience seasonal fluctuations in sales that affect their cash
balances, accounts receivable, and inventory. Even though Target has higher sales than
Macy's, Macy's earnings per share typically exceed Target's during the fourth quarter,
when sales peak. This reflects higher leverage at Macy's as its EPS is more influenced by
sales compared to Target. Asset management can be a challenge in companies with
seasonal sales, and financial managers must be prepared to avoid cash flow problems or
the need to take out loans.

Today, many retail companies have become better able to match their sales and orders
thanks to computerized inventory control systems linked to online point-of-sale terminals.
These systems allow for more accurate tracking of sales and inventory, making it easier for
managers to adjust orders or production as needed. The ability to react will depend on the
predictability of the market and the complexity of the production process.