Many consumer electronics product vendors suffer from asymmetric sales calendars, with the bulk of annual sales usually generated during the back-to-school and holiday seasons. While sales may be bunched in October, November and December, monthly expenses during less busy seasons remain largely the same. Given the seasonal nature of the business, by spring or summer, cash flow can become strained. This can make it difficult to fund inventory for the upcoming season’s orders. Most companies understand this cash flow imbalance and have learned to “compensate” somewhat. But some companies find it hard to manage the stresses of a lopsided revenue stream using conventional methods.
For example, an established digital picture frame company generating $25-$30 million in annual revenue may ship up to 70 percent of its sales in Q4. Although the company may be profitable, its growth potential could be constrained if it were relying solely on the cash flow generated in Q4 to meet current business expenses through the rest of the year.
A company’s lifeblood is its cash flow. The highly seasonal nature of a business creates fluctuations in the ebb and flow of cash. In order to continue to fuel growth, highly seasonal companies need to find a way to deal with these issues. One alternative is to pay slow, another might be to slow down production. Neither of these options is desirable.
It’s very difficult to predict just how much cash will be needed to fund the following season’s orders plus any growth objectives, not to mention unforeseen circumstances. Companies can obtain a bank line of credit. However, a traditional program might be too inflexible to meet high growth or unexpected expenditures. Most companies also find it hard to increase a bank facility during the down season.
A Two-Pronged Solution
What the company needed was more flexible financing that would make funds available when necessary. CIT’s solution was its asset-based credit facility which could allow for access to cash when needed, even if the request exceeded the availability provided in a traditional bank line of credit.
“A company may have strong cash flow during one part of the year, but funds get tighter until it ships heavily and becomes flush with cash again,” Bob Lewin, Director, CIT notes. “An asset-based credit facility allows a company to operate more effectively.”
By virtue of CIT’s assumption of the credit risk on the digital picture frame company’s accounts receivable and CIT’s collection of the accounts receivable, CIT can become intimately acquainted with the company’s business, which would enable CIT to understand the company’s current circumstances and future expectations. This intimacy, together with a financial forecast prepared by the company, could enable CIT to establish an initial asset-based credit facility based on the company’s inventory and accounts receivable. Given a history of performance, along with the ongoing data (booked orders, production schedules, etc.), a non-traditional approach could be created to add flexibility during the soft sales season.
CIT works to understand a company’s business, operations and needs. With the details gleaned from a close business relationship, CIT would be able to offer an asset-based credit facility with the flexibility to enable a company to continue to grow through the seasonal swings of its operation.
There is no cookie-cutter approach — each program is unique, with the size of a facility based on the nuances of the financial need and the individual nature of each company.
An asset-based credit facility helps solve the company’s short-term funding needs and also provides a second benefit. By outsourcing its accounts receivable and collections to CIT, the company is able to reduce its fixed monthly expenses during its slower seasons.
CIT’s two-pronged receivables outsourcing with flexible lending solutions could prove critical to the company’s bottom line, its growth and its executives’ peace of mind.
The ability to obtain a more flexible financing program makes it easier to capitalize on your growth potential. Working with a financial services institution that understands your industry and your business cycles can help you achieve your goals.
CIT Commercial Services (CIT) is one of the nation’s leading providers of financial services to consumer product companies and has been providing financing and advisory services to small, mid-sized and large businesses for more than a century. It typically forms long-standing relationships with clients, both large and small, in a wide variety of industries, including consumer electronics. For more information:
https://www.cit.com/commercial-services • 800-248-3240