TIMING IS EVERYTHING 



Sound Borrowing Principles for the Seasonal Business 



Ken Buzzell 



The same pruidelines tor healthy 

 borrowing that apply to any 

 business hold as well tor seasonal 

 enterprises. As a lender, 1 always 

 look at what I call the "5 C's of 

 credit: character (credit history, 

 m;inagement ability), capital 

 (tin;Tncial position compared to 

 industry, liquidity), capacity 

 (earnings, repayment ability), 

 conditions (special risk tactors), 

 collateral (security tor long-term 

 loans). Some standard ratios also 

 help m evaluating any business. 

 Net worth should be at least 50 

 percent, preterably closer to 65 

 percent. The ratio of current assets 

 (including inventory) to liabilities 

 (like outstanding bills) should be at 

 least 1 .5 to 1 , or better yet, 2 to 1 . 

 For a seasonal business, financial 

 liquidity and inventory manage- 

 ment are probably the two most 

 important factors in sound borrow- 

 ing. And for overall financial 

 health, discipline is crucial. 



Inventory Management 



Inventory management is a big part 

 of every seasonal business. Are you 

 moving inventory effectively, or do 

 you have to discount large blocks? 

 Most people tend to be too opti- 

 mistic when ordering, or they order 

 too soon. You should avoid carrying 

 debt for inventory year to year. Old 

 formulas ("5 percent over last year's 

 order") don't work in today's vola- 

 tile consumer market. You have to 

 track the history ot your inventory 

 year to year and analyze it against 

 current market conditions. If your 

 business does not operate on a 12- 

 month cycle, then you should be 

 purchasing some ot your inventory 

 with earnings because you don't 

 know what the market will be in 



two or three years. For very long- 

 term investments like Christmas 

 trees, we bankers have a special 

 technical term called "feeding the 

 beast," referring to the years of 

 plugging capital in before you get 

 anything out. But that's another 

 article in itself. 



Liquidity 



Liquidity, or available cash, is an 

 important measure of the health 

 of your business. Do you have 

 enough to carr>' you through the 

 off-season? What about interrup- 

 tions to your business, like weath- 

 er catastrophes? Adequate re- 

 serves are crucial to high risk sea- 

 sonal enterprises. There are ways 

 to assess liquidity other than 

 counting the cash in your pocket. 

 For example, a mature business 

 should not have to finance ac- 

 counts receivable, even if the 

 vendors you sell to are less than 

 prompt in paying you. You should 

 have enough cash on hand to 

 carry you through delays. New 

 businesses operate under different 

 guidelines. You may need financ- 

 ing for "growth receivables" until 

 your profits catch up with vendor 

 lag times. 



Discipline 



Discipline is the most vital ingre- 

 dient oi the successful seasonal 

 business. You're likely to make up 

 to 90 percent oi your income in 

 three months. It's important to 

 pay oft your operating line of 

 credit immediately, both to save 

 on interest and to resist tempta- 

 tion. This takes discipline when 

 that "slug of income" hits. Capi- 

 tal spending should be based on a 

 list of needs you have carefully 



drawn up before the money is in 

 your checkbook. Remember that 

 probably at least 50 percent of 

 your expenses are fixed and pay- 

 able every month. One person in 

 your operation should be respon- 

 sible tor keeping an accurate, up- 

 to-date, monthly cash flow 

 worksheet. 



Keeping track ot your financial 

 situation month to month helps 

 you plan your financing year to 

 year. An annual line of credit 

 should be set up tor your potential 

 needs (based on historical data) 

 and your unique business cycle: 

 when you plant and when you sell. 

 You need to have enough cash 

 available to meet your off-peak 

 operating expenses, but you don't 

 want to borrow more than you 

 need. With careful planning, a line 

 of credit is there when you need it - 

 and you'll only need it tor seasonal 

 production. You should plan to pay 

 off bills before you pay oft debt. 

 Most important, segment your 

 credit line year by year: pay off last 

 year's debt with last year's crop. 

 Meticulous record-keeping is the 

 only way to track where your bor- 

 rowed dollars are actually going. 

 It can also take discipline to turn 

 on and off your seasonal expenses. 

 Labor is a prime example. Don't 

 hire seasonal help tcx) soon. Plan 

 for overtime during your peak 

 season, then cut off extra labor as 

 soon as your season is over. TTiis 

 can be diftfcult, but with today's 

 nartow profit margins and high 

 labor costs it's absolutely essential. 

 Keeping track c:)f your financial 

 situation month to month helps 

 you plan your financing year to 

 year. An annual line oi credit 



December 1991 /January 1992 21 



