Sizing the cash trough on a seasonal inventory build

Seasonal borrowing goes wrong in a specific way: the owner knows roughly how much stock they need to buy and borrows roughly that amount. The amount of stock and the amount of cash required are different numbers, arriving on different dates, and the gap between them is where the facility is either right-sized or badly wrong.

What you need is a month-by-month cash line with the trough marked on it. It takes an hour.

Build the line

Four inputs, by month, for a full cycle plus two months either side:

1. Cash out for goods, dated when you actually pay, not when you order or receive. Supplier terms move this by 30 or 60 days and the movement is the point.
2. Cash in from sales, split by how it settles. Card sales land in days. Trade accounts land on terms and some land late.
3. Fixed operating cash out — rent, payroll, utilities, insurance, existing debt service. This continues whether or not it is the season.
4. Opening cash, and any minimum operating balance you cannot go below.

A worked cycle

Goods received: June nothing, July 60,000, August 96,000, September 74,000, October 12,000, November 8,000.

Sales: June 52,000, July 58,000, August 61,000, September 84,000, October 126,000, November 214,000, December 297,000, January 96,000.

The cash balance runs:

• June: 59,440
• July: 69,760
• August: 23,920
• September: -40,520
• October: -46,280
• November: 85,080
• December: 304,840
• January: 411,120

The trough is October at -46,280. Total seasonal purchases are 250,000.

Three things fall out of that, and none of them is obvious from the purchase total.

Sizing the facility

Take the trough, add a cushion, and round up. At 25 per cent, 46,280 becomes 57,850, so a 60,000 line.

The cushion is not optional. Everything in the model that can move, moves against you in the same direction: sales arrive later than planned, collections stretch, and the supplier who offered 30 days wants a deposit this year. A 25 per cent cushion on the trough is a starting point; if last year's actuals differed from the plan by more than that, use your own error rate.

Then choose the product shape, and let the shape of the trough choose it:

• A revolving line fits, because the requirement rises and falls. You draw in September, repay in December, and pay for the period you used it. Check the unused line fee and draw fees, and check for a clean-up period requiring a zero balance for a stretch each year — with this cash shape, a clean-up requirement in January is easy to meet and one in September is not.
• A term loan fits badly. You take the full amount in month one, pay interest on all of it for the whole term, and still have the money in December when you do not need it.
• A fixed-total-repayment product fits worst. The cost does not fall when the cash comes back early, so the December surplus buys you nothing.

The two numbers to track after you draw

What to do with the model

1. Build the line for the coming cycle before you place a single seasonal order.
2. Mark the trough month and the trough amount, and put both in the credit application. A lender reading a specific dated requirement responds differently from one reading "we need 250,000 for inventory".
3. Ask for availability that covers the trough plus your cushion, and for a facility you can repay without penalty when the season turns.
4. Rerun the model with sales 15 per cent lower and collections 15 days slower. If the trough doubles, arrange more availability now, while the numbers still look good.
5. Agree the markdown dates in advance for anything unsold by a set date, and model the cash those markdowns produce.

Borrowing against a season you have run before is one of the more defensible reasons to take on debt. It stops being defensible the moment the amount is set by the size of the order rather than by the depth of the hole.