Which practice best supports a credit decision when seasonality affects earnings?

• A. Testing underlying assumptions and scenario analyses
• B. Relying solely on peak-season revenues
• C. Ignoring seasonality in the forecast
• D. Relying on marketing forecasts only

Answer: (C)

When earnings vary by season, the most reliable way to inform a credit decision is to test the forecast assumptions and run scenario analyses that reflect different seasonal patterns. This approach reveals how revenue, margins, working capital needs, and debt service behave not just in the peak period but through slower months as well. By exploring base, optimistic, and pessimistic cases, you can gauge liquidity cushions, covenant risk, and the borrower’s ability to weather off-peak periods. Relying on peak-season revenues alone overstates cash flow and understates risk, while ignoring seasonality or relying only on marketing forecasts fails to capture timing and cash implications. Bringing in tested assumptions and multiple scenarios gives a fuller, more realistic view of risk and capacity to meet obligations.