Inventory Financing for the Holiday

¶ … Inventory Financing for the Holiday" by Karen Klein.

Business Week. September 11, 2009 http://www.businessweek.com/smallbiz/content/sep2009/sb20090911_753021.htm

The article discusses the tight credit market and the ramifications this will have for inventory levels at retailers this upcoming holiday season. Several key points are addressed in the article pertaining to credit policy, inventory policy and cash flow.

As a result of the credit crunch, small retailers are struggling to find ways to build their inventory in advance of the holiday season. At the heart of the article is the owner of a bike shop, who after paying down his line of credit lost it. He now needs to find ways to adjust his cash flow to build his inventories before the peak holiday season.

Retailers are edging up against their credit limits and must find new ways to acquire their inventory. They can decide to seek alternate sources of credit. However, some of those bear higher interest and in many cases may represent more debt than they are willing to take on. There is also the possibility of extending their inventory financing by stretching their payables.

Retailers in general are already making adjustments so that they can better manage their inventories and their credit. The difficulties in the credit market are also impacting the cash flow decisions at small retailers, especially those with relatively seasonal products. One owner was using his credit card to fund ongoing cash needs since his bank was unwilling to provide the revolving credit facility he needed.

Relationship to Budgeting Concepts

This story relates to credit policy not only with respect to the banks but also with respect to the businesses themselves. In times such as these when financing is scarce, firms must seek alternate ways to manage their cash flow. A store that needs to build inventory has a few options short of obtaining credit. One form of credit is inventory financing. The store would thereby stretch its payables beyond the normal terms with their supplier in order to increase its buying capacity. Another option possible is to tighten the store credit, so that receivables are turned over more quickly.

This story also relates to inventory policy. Retailers must determine the best means of managing their inventory during the budgeting process. The article addresses the need for improved inventory forecasting during situations where credit is unavailable. This allows for less excess inventory in the store, which again will extend the buying capacity of the store. Forecasting inventory levels is critical to any budget, but this case illustrates how better forecasting can improve the bottom line and the cash flow.

With respect to cash flow, many firms rely on revolving credit to smooth out the cash flow inherent in their businesses. Under normal circumstances, this credit is available. However, when it is not available, firms need to figure out new ways to create cash flow. The use of a credit card as a substitute for a line of credit highlights the downside of losing cash flow and not having a stockpile of cash available. It also highlights the need for budgets to include variables such as a higher cost of capital that will accrue from tightening credit markets.

Analysis

The credit crunch has impacted businesses in a number of negative ways. The business owners in this case have alluded to the improvements they have been forced to make in their operation in order to survive without credit. However, with these improvements there is little left to improve. That calls into question the budgeting process.