Definition: Window dressing is a technique used by companies and financial managers to manipulate financial statements and reports to show more favorable results for a period. Although window dressing is illegal or fraudulent, it is slightly dishonest and is usually done to mislead investors.
What Does Window Dressing Mean?
Companies typically window dress their financial statements by selling off assets and either purchasing new assets or using this money to funds other operations. This way the cash balance on the balance sheet appears to be at a normal amount.
Unfortunately, this strategy can only fool novice investors. Experienced investors can analyze the statement of cash flows and long-term assets to see that the company is funding current operations by selling off assets.
Example
Window dressing is probably most commonly found in investment brokers and mutual fund houses. Mutual fund managers often sell off poor performing stock and other investments near the end of a period and use the money to buy high performing stock. This way new investors see the portfolio of high performing stock and want to invest. Obviously, this is only a short-term strategy for novice investors. Any experienced investor will analyze portfolio trends over the past few periods to see if the funds managers are investing wisely.
In short, window dressing is a short-term strategy to make financial statements and financial portfolios appear more consistent and desirable than they really are. Although window dressing does not amount to fraud in most circumstances, it is usually done to mislead investors from the true company or fund performance.
