After the bad times, how to cope with the good

A New Year and a fresh start should hopefully show a healthy looking order book and pipeline after perhaps a couple of years of trading losses funded by cash reserves. The challenge now is how to fund the stock build up required to satisfy the order book. Sound familiar?

In the short term, the common source of funding here would be an increased bank overdraft. For many businesses this may not be an option given the more stringent lending criteria that now apply, particularly for businesses that have incurred losses in the last year or so. Another option could be to stretch creditor payment terms but there is a limit.

As a last resort, you may have to introduce personal funds however this may not be feasible. Assuming that you are not facing an imminent crisis, where can you look for inspiration to resolve your dilemma?

The Arcadia Group, under the ownership and stewardship of Sir Phillip Green, has been a success story in recent years in its ability to generate cash. Sir Phillip is quoted as saying that the “business model is very strong. We have a very strong supply chain. The key is to give customers merchandise as often as they want it”. So how strong is your supply chain? In recent years you may  have moved manufacturing overseas to reduce costs, typically to Eastern Europe or to China.

This represents a fundamental shift in your business, but has your funding structure changed accordingly? Longer lead times will inevitably occur and relying on stretching creditors’ goodwill until purchases can be converted into sales and drawn down on an invoice discounting facility may no longer be an option. Driving down stock levels certainly generates cash and many businesses will have done this over the past 18 months.

Effective stock control is certainly a very good discipline. Care has to be taken to avoid ‘stock outs’ however it’s doubtful that the shelves are often bare at Arcadia. How close are you to your customers and to what extent do you work with them to determine their likely requirements over the next six months or so, in order to manage your stock levels effectively?

The crux is taking a step back and taking a long hard look at your business. How has it changed over the past couple of years, in what ways does it need to change? Think carefully about your supply chain and your stock holding policy. Prepare or redo your cash flow projections. Challenge your way of thinking, be creative but realistic in your modelling.

Once you are comfortable, share your projections with your funders. The chances are that you will be pleasantly surprised by their reaction; far better to approach them for funding so as to build up stock levels in a planned and managed way than a desperate plea for funding so as to avoid being placed on stop by a key supplier.

The starting point is to take that step back.