Pitfalls in Restructuring Solutions for Seasonal Businesses
Ted Tzafaroglou | March 2020
Developing and implementing restructuring solutions for a business, with pronounced peaks and valleys in sales volume, pose unique challenges for all stakeholders. This is particularly true when a business is undercapitalized. For example, picture a business which generates 70% of its annual sales during a three month period. The sales are dependent upon products manufactured in the Far East, shipped to the U.S. to be assembled, packaged to meet customer specifications and, then, shipped to distribution centers across the country. Assuming payment from customers follows invoice dates by an average 60 to 90 days, and a scenario has been created with a multitude of challenges for the Company, its suppliers and its lenders. Conversion Cycle From the moment the Company places an order with its supplier in the Far East to the day payment is received from the customer, 165 to 190 days could lapse. Since many suppliers in the Far East require payment for product upon shipment (or certainly before product is released from the docks), the Company likely will find itself bearing the burden of funding the inventory and related receivables for the duration. Although opportunities exist to finance portions of the inventory and receivables, the portions not financed can be substantial. Production Planning Given the lengthy and expensive Conversion Cycle described above, Management must be skilled in understanding what needs to be ordered, when it needs to be ordered and have some assurance it will be sold in the very near future. Obviously, understanding customer demand for each peak season is critical. If too much product ordered, it likely will not be moved for another year and its value as collateral diminishes quickly. Making matters more complex are multiple SKUs and the risk of new product generations or brand new product launches. On the flip side, if product orders fall short of demand, current and future sales could be lost forever. Many companies are not capitalized sufficiently to successfully handle such peaks and valleys in their business. Lines of credit can help absorb some of the financial requirements, but lenders may get nervous advancing on inventory for which a pending sale is either far into the future or potentially non-existent. Strategies There are strategies which proactively address risks faced by all stakeholders. To learn more, contact New England Consulting Partners, LLC. Theodore Tzafaroglou is a Principal with New England Consulting Partners, LLC and can be reached at firstname.lastname@example.org or 734-377-1053.