Window Dressing

What is Window Dressing?“Window dressing” is commonly used to refer to how a pedestrian facing the window of a retail business is presented to make their goods look most appealing. However, when the finance world references it, it means something slightly different. In finance, window dressing refers to the efforts taken to make the financial statements look better before they are publicly released.Significance of Window DressingWindow dressing is vital for a company because every business wants its financial information to look as appealing as possible. It is what attracts new business opportunities, investors, and even consumers.The downside to window dressing is that, on the whole, it’s looked at with scepticism. Window dressing comes with at least a slightly negative connotation. This is because it sometimes involves making unethical or even illegal changes to numbers, charts, timelines, orders, etc., to make the financial picture of a company look the most appealing to outsiders.Example of Window DressingTo get a clear picture of what window dressing may look like, consider the following example:Company ABC is in the process of generating its financial reports for the end of the reporting period. It is looking to make the company appear as attractive as possible to draw in new shareholders and investors. To this end, Company ABC window dresses by suddenly “acquiring” and holding substantial cash to make their company look more liquid – easily able to make loan payments, hand out dividends, or use their substantial cash flow to invest in expanding the business.The company also tweaks its sales projections, stating them as significantly higher than they probably are in reality. The ultimate goal is to change anything they can to drive their stock price higher and make potential investors more interested.Window dressing doesn’t typically involve making genuinely false representations that will violate the law. It’s usually more of bending but not breaking the truth. For example, Company ABC can make itself appear flush with cash flow by selling a significant asset just before the end of the accounting period. They may be neglecting to reveal to investors that they need the asset to operate and, therefore, will be buying it right back in the next accounting period.The company’s future sales projections may not be technically false – just a matter of selecting the most optimistic among many estimates arrived at using several different projection metrics.Window Dressing and Mutual FundsWindow dressing is often performed heavily with mutual funds. At the end of a reporting or financial period, mutual funds often quickly sell stocks in their portfolio that are not performing well. The money generated from the sales is then used in a quick turnaround to buy shares of stocks in the high-performance range. The end-of-period “rebalancing” of the fund’s assets is designed to make it appear better than it is at selecting winning stocks.Through window dressing, mutual fund owners and managers make the fund look more promising. Potential investors see the fund full of high-performing stocks – and don’t see the poor-performing stocks that were recently dumped – and are, thus, much more likely to invest in the fund. Such a practice is the primary goal of window dressing – to attract investors and add more income to the investment pool.Final WordWindow dressing is a short-term strategy used by companies and funds to make their financial reports and portfolios look more appealing to clients, consumers, and investors. The goal is to attract more people and more money, hopefully boosting the next reporting period’s bottom line.

Evita Veigas

29 April 2023