Peak working capital

A balance sheet is a photograph taken on one day, and for a seasonal business the day chosen is frequently the most flattering one available. A retailer with a December or January year end reports after the stock has been sold and the tills have rung, so both inventory and the apparent funding need look small.

Peak working capital is what the business actually has to fund at its worst point in the year, typically once stock has been bought and paid for and the selling season has not yet arrived. For a toy retailer that is autumn rather than December, and the gap between the two can be several times the reported year end figure.

For a valuation built on annual cash flows this mostly washes out, because what enters free cash flow is the change across a full year and the intra year swing reverses within it. Saying that explicitly is worth doing, because an interviewer raising seasonality is often testing whether you know which of the two questions you are being asked.

Where it matters enormously is funding. A lender sizing a revolving facility, or a sponsor deciding how much cash the business must hold, cares about the peak and not the year end, and a model carrying only annual balances cannot answer them. That is why working capital in a leveraged deal is often modelled monthly while everything else stays annual.