By James Nicholson-Smith, Business Development Director & Managing Principal, West Midlands Region, The FD Centre

“I can see where you are coming from” replied Bob “and it’s healthy to get the real issues out on the table. Previously, you have only been interested in the price and the overall budget for the year. Let me show you how it works for us.

Initially, we agree a product concept with our customers for Christmas next year’s lines. Typically this starts happening about July the year before prior for some retailers down to about 12 months. Last year, more retailers left their decision making late because they were all jittery about the market. Assuming everyone leaves it until January, we set up the projects with you then.

After 8 weeks we receive a proposal from you, which is about 90% of what we want. We finalise this over the next 30 days. This takes us to March, April if we are lucky. We then go back to get the costings from our suppliers and samples before we can present the final version to our customers. Typically this takes another 6 weeks.

So we are now at the end of June. We will have paid you at the end of May. Assuming we buy the product from China mid July we pay them 50% with order and the other 50% when the good arrive. As a typical order will be £200,000 per project, we will be paying £100,000 in July and another £100,000 in early November. Once the goods arrive the retailers check the samples before placing their orders.

We start shipping to the retailers from Mid November onwards. They will take 80% of the stock in November and early December. We will get paid at the end of December for these. The balance is taken by Easter. From our accounts you can see that we make 40% gross profit less your costs. Therefore we invoice a total of circa £333k in November and December and the rest is always a risk.

For us the cycle is even worse, we are paying out £25k in May, £100k in July, £100k in November and receiving £266k in by the end of January. We don’t actually make any profit until we sell the tail end of the stock up to Easter. Therefore if we pay you earlier we would be funding 2 cycles at the same time. If you multiply this by the 6 projects we do with you each year, your £150k issue is our £1.3m issue.”

Bob and Stuart look at each other not really knowing what to say next. It dawns on them both that whilst sales and costs are important, the size of the investment they are both making in doing the business is huge and the period it takes to get repaid and convert that theoretical profit into cash is incredibly long.

The above dialogue explains that the working capital requirement is the amount of cash that is spent on a sale before the revenue is actually received in cash. For Product Marketing this was £22,500 per project for 3-4 months before they receive the repayment of the costs and the profit as cash in the bank. Trading was investing £1.3m over 7 months and then waiting another 2 months before the cost is repaid and a further 4 months before they see the profit as cash in the bank.

Reaching a workable solution to managing your working capital

The key point for an entrepreneur, is to understand that the working capital cycle for every business is different. Some businesses require huge working capital requirements whilst others eg retailers typically have very short and fast moving cycles.

Over time the banks and other funders have provided bespoke funding to address different elements of working capital eg invoice finance to fund the period from invoicing to getting paid. Import finance funds the period from ordering product to actually receiving it into the warehouse.

Until an entrepreneur is faced with negotiations with a supplier or a customer similar to the scenario above, many struggle with the theoretical discussion on this subject with banks and credit insurance companies — it’s like a different language. For those businesses with finance directors, these communication issues do not arise because the parties understand each other perfectly.

As the largest provider of part-time Finance Directors in the UK, the FD Centre can help businesses achieve their strategic objectives. To find out if your business could benefit from a FREE Business Strategic Review and receive valuable advice for your business’s financial planning, visit www.thefdcentre.co.uk

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