How can seasonality affect liquidity risk in debt service planning?

• A. Seasonality never affects liquidity
• B. Seasonality always improves liquidity
• C. Seasonality only affects tax timing
• D. Seasonality can lengthen the cash conversion cycle and raise liquidity risk if debt service depends on off-season inflows

Answer: (D)

Seasonality affects liquidity risk by shifting when cash comes in versus when debt service payments are due. When revenue and receipts peak in certain seasons and dip in others, the cash conversion cycle can lengthen during lean periods, tying up cash longer before it’s available for debt service. If debt service depends on those seasonal inflows, lean periods can lead to cash shortfalls and higher liquidity risk. The other statements miss this timing issue: seasonality does impact liquidity, it does not always improve it, and debt service timing involves cash flows beyond simple tax timing.