Turnover vs stock valuation
Discussion
So you have less than 1 months stock - which isn't out of the ordinary either way and no credit risk at the customer end. Nothing to immediately worry anyone there really
Are your creditor days sufficient that you don't pay for the stock until after you have sold it (on average)?
Could you run with less stock?
Is there any benefit to running with more?
Are you bothered what the bank thinks? (i.e. is it the business's money or the bank's money that is funding the stock?)
Are your creditor days sufficient that you don't pay for the stock until after you have sold it (on average)?
Could you run with less stock?
Is there any benefit to running with more?
Are you bothered what the bank thinks? (i.e. is it the business's money or the bank's money that is funding the stock?)
Which alarm bells are you worried about?
On the one hand, if the stock holding is too lean then there's a risk you can't get supply to meet customer orders, which hits cashflow. Depending upon the area you specialise in, you're potentially open to counterparty risk (suppliers folding, being out of stock, etc.).
On the other hand, if the stock is perishable then there's a risk that it is close to EOL in that 1-month period, and you need to turn stock faster.
I think if I were analysing things, I'd want to know the above, and I'd also want to see a breakdown (are you "hiding" a few lines that never turn, for instance). But the "why" to the whole exercise really matters first, I'd say.
On the one hand, if the stock holding is too lean then there's a risk you can't get supply to meet customer orders, which hits cashflow. Depending upon the area you specialise in, you're potentially open to counterparty risk (suppliers folding, being out of stock, etc.).
On the other hand, if the stock is perishable then there's a risk that it is close to EOL in that 1-month period, and you need to turn stock faster.
I think if I were analysing things, I'd want to know the above, and I'd also want to see a breakdown (are you "hiding" a few lines that never turn, for instance). But the "why" to the whole exercise really matters first, I'd say.
What industry are you in? What is the order lead time? A poster above raises excellent points regarding shelf life. Without more details it is impossible to come up with a sensible answer. If, for example, it is fresh food, then one month is far too much, if long lead time items, then one month may not be enough. What about economic order quantities?
This total depends on the business and what type of 'stock' you have - raw materials, WIP or finished goods and the mix between.
To put it into context - I have 3 clients:
1 is a fresh food distributor - turnover about £100m, stock peaks at about £400k (for the pedantic this excludes specific promotion stock builds which can lead to increased holdings for a short period) - mainly 1 day's very short shelf life plus some longer life drinks & snacks. Buys in everything, just distributes - stock in overnight, loaded onto the fleet very early morning, at customers during mid-morning
2 is a precision engineering business - turnover about £10m, stock almost negligible as we manufacture to order using free issue raw materials; we do have some WIP but our finished goods are despatched & invoiced within hours
3 is also a precision engineering business - turnover about £20m and growing, stock upwards of £4m - but we manufacture a standard range of products that have to be available immediately (for super high margins) - we bear all the stock risk and cost but the margin reflect this - and we need to maintain a stock of the bought in components that are attached to our units as well.
I've seen businesses where holdings of certain stock lines of over 3 years was sensible (not the whole stock manifest, just some individual lines); but also worked with a shoe manufacturer that had >20 years of some stock lines on a 'simple' calculation (that wasn't sensible!).
To put it into context - I have 3 clients:
1 is a fresh food distributor - turnover about £100m, stock peaks at about £400k (for the pedantic this excludes specific promotion stock builds which can lead to increased holdings for a short period) - mainly 1 day's very short shelf life plus some longer life drinks & snacks. Buys in everything, just distributes - stock in overnight, loaded onto the fleet very early morning, at customers during mid-morning
2 is a precision engineering business - turnover about £10m, stock almost negligible as we manufacture to order using free issue raw materials; we do have some WIP but our finished goods are despatched & invoiced within hours
3 is also a precision engineering business - turnover about £20m and growing, stock upwards of £4m - but we manufacture a standard range of products that have to be available immediately (for super high margins) - we bear all the stock risk and cost but the margin reflect this - and we need to maintain a stock of the bought in components that are attached to our units as well.
I've seen businesses where holdings of certain stock lines of over 3 years was sensible (not the whole stock manifest, just some individual lines); but also worked with a shoe manufacturer that had >20 years of some stock lines on a 'simple' calculation (that wasn't sensible!).
Edited by sleepezy on Thursday 5th April 08:43
Thanks for your answers guys. I import home/garden products for resale to trade/public, but I also buy from UK distributor's and most of this stock is sold before I pay my UK suppliers.
On imports, I pay upfront from the current account and this stock typically takes 4-6 months to sell.
I was only asking because my bank "relationship manager" was probing why it's so high, which I found unusual and thought maybe I was missing a trick.
My bank go through relationship manager's very quickly and they are utterly useless, the latest guy is 25-26, uni type with a degree in business and got a job at the bank. His predecessor was worse. These guys have never worked in an actual business and they clearly don't understand mine despite numerous visits.
Time to change bank I think, any request get's referred to a higher elusive department and everything takes months, and they want constant cash flow forecasts.
The tip of the iceberg was my recent business loan application of £15,000 to cover new equipment, they quoted 5.9% then reverted to 16.9% due to "risk", and wanted new legals drawn up with my solicitor...more fee's. Despite already having personal guarantee's, a debenture on my house up to £60,000 and 10 years steady trading history with increasing profits every year, apparently it was risk. The debenture still covered the security they needed.
In the end I took out a personal Tesco Loan at 2.9% and paid to to the company as a director's loan.
I'm importing £60,000 of Christmas stock in August but it won't sell until December and I have no way of paying for it without an extended overdraft.
They advised against Import Finance, they said I don't import enough.
It's HSBC by the way. A very corporate bank.
On imports, I pay upfront from the current account and this stock typically takes 4-6 months to sell.
I was only asking because my bank "relationship manager" was probing why it's so high, which I found unusual and thought maybe I was missing a trick.
My bank go through relationship manager's very quickly and they are utterly useless, the latest guy is 25-26, uni type with a degree in business and got a job at the bank. His predecessor was worse. These guys have never worked in an actual business and they clearly don't understand mine despite numerous visits.
Time to change bank I think, any request get's referred to a higher elusive department and everything takes months, and they want constant cash flow forecasts.
The tip of the iceberg was my recent business loan application of £15,000 to cover new equipment, they quoted 5.9% then reverted to 16.9% due to "risk", and wanted new legals drawn up with my solicitor...more fee's. Despite already having personal guarantee's, a debenture on my house up to £60,000 and 10 years steady trading history with increasing profits every year, apparently it was risk. The debenture still covered the security they needed.
In the end I took out a personal Tesco Loan at 2.9% and paid to to the company as a director's loan.
I'm importing £60,000 of Christmas stock in August but it won't sell until December and I have no way of paying for it without an extended overdraft.
They advised against Import Finance, they said I don't import enough.
It's HSBC by the way. A very corporate bank.
At the expense of prying, how big is the hole? The whole £60k or a proportion of it? And for how long? I'm assuming that the debenture etc. are a fixed and floating first charge over the business assets, which would preclude you from using other finance providers to borrow from?
Some strategies I've used in the past (myself or with clients - I am not an accountant BTW):
If importing from outside the EU, look at running your own bonded warehouse as a way of delaying the upfront payment of VAT and duty on import? In the old days this was a separate space, but with "common storage" these days that can be done just with software. Then the VAT and duty liability is due only when you "take the stock from the warehouse" which in your model is likely to be at roughly the same time as when you sell it. https://www.gov.uk/guidance/customs-warehousing Might be worth modelling the cashflow benefits vs implementation costs (it is obviously all about timing, but it sounds like what you mainly have here is a timing issue).
If that is too big a burden, it can also be possible to set up a Deferment Account with HMRC for import VAT. It isn't a big benefit, but it can shift the actual payment date of the VAT 30 days down the line. That might (on its own or in combination with other measures) be enough to make the cashflow work for your imports.
Depending upon the size of your business, are you on cash accounting for VAT or standard accounting? I once sorted out a cashflow hump by swapping to cash accounting (since all the clients paid on 30-60 days, whilst VAT expenses were minimal, it gained well over a month's worth of VAT as a one-time cashflow bump). Limit for cash accounting is £1.3m I believe at the moment.
There are other asset-based finance options models that exist. You just have to make sure that you don't fall foul of the charge / debenture issue, since any asset your business buys will then be covered by your debenture so you have to be careful about who owns what and when. So the asset-based finance would have to kick in before you took ownership of the goods...
A friend of mine got around that by importing goods on his account as a self-employed individual, then putting into an asset-based finance agreement (in essence mortgaging them), then selling them to his Ltd business as the orders came in.
Is there a lead time issue for cashflow (as in pay up-front for goods, wait months for delivery)? If so, will the vendor consider a Letter of Credit to secure production? And will HSBC consider lending on that basis (since their lending will only go up once the goods have landed, so the business assets increase by the stock amount)? HSBC as you know have a trade finance team. I've used Stand By Letters of Credit in the past for much these purposes.
I'm sure others can offer other suggestions for moving cashflow around. Do you have a commercial landlord and a good relationship? Would they consider monthly payments (if you do not already pay that way)?
You'll gather that I'm trying to see if there is a portfolio of arrangements you can put together under the category of "cashflow management" to bridge some or all of your gap. Obviously those only work once - next time around, you'll be back to finding funding (unless you can bank enough to cover the next wave of imports).
That said, most of those are going to be more expensive than your Tesco loan - can you get more Tesco loans?!
Some strategies I've used in the past (myself or with clients - I am not an accountant BTW):
If importing from outside the EU, look at running your own bonded warehouse as a way of delaying the upfront payment of VAT and duty on import? In the old days this was a separate space, but with "common storage" these days that can be done just with software. Then the VAT and duty liability is due only when you "take the stock from the warehouse" which in your model is likely to be at roughly the same time as when you sell it. https://www.gov.uk/guidance/customs-warehousing Might be worth modelling the cashflow benefits vs implementation costs (it is obviously all about timing, but it sounds like what you mainly have here is a timing issue).
If that is too big a burden, it can also be possible to set up a Deferment Account with HMRC for import VAT. It isn't a big benefit, but it can shift the actual payment date of the VAT 30 days down the line. That might (on its own or in combination with other measures) be enough to make the cashflow work for your imports.
Depending upon the size of your business, are you on cash accounting for VAT or standard accounting? I once sorted out a cashflow hump by swapping to cash accounting (since all the clients paid on 30-60 days, whilst VAT expenses were minimal, it gained well over a month's worth of VAT as a one-time cashflow bump). Limit for cash accounting is £1.3m I believe at the moment.
There are other asset-based finance options models that exist. You just have to make sure that you don't fall foul of the charge / debenture issue, since any asset your business buys will then be covered by your debenture so you have to be careful about who owns what and when. So the asset-based finance would have to kick in before you took ownership of the goods...
A friend of mine got around that by importing goods on his account as a self-employed individual, then putting into an asset-based finance agreement (in essence mortgaging them), then selling them to his Ltd business as the orders came in.
Is there a lead time issue for cashflow (as in pay up-front for goods, wait months for delivery)? If so, will the vendor consider a Letter of Credit to secure production? And will HSBC consider lending on that basis (since their lending will only go up once the goods have landed, so the business assets increase by the stock amount)? HSBC as you know have a trade finance team. I've used Stand By Letters of Credit in the past for much these purposes.
I'm sure others can offer other suggestions for moving cashflow around. Do you have a commercial landlord and a good relationship? Would they consider monthly payments (if you do not already pay that way)?
You'll gather that I'm trying to see if there is a portfolio of arrangements you can put together under the category of "cashflow management" to bridge some or all of your gap. Obviously those only work once - next time around, you'll be back to finding funding (unless you can bank enough to cover the next wave of imports).
That said, most of those are going to be more expensive than your Tesco loan - can you get more Tesco loans?!
I hate the way that banks work, particularly with sme customers. Instead of saying 16.9%, which is bonkers in today's world, why not just man up and tell you that it doesn't want to lend you any more money? It clearly doesn't,
A relationship manager for SMEs at a large bank like HSBC has no freedom to do anything other than tap numbers into his laptop and wait to see what the computer says. If it says no, there is no way to realistically challenge or override that. If it says yes, but with conditions, the RM has very little chance of removing those condtions.
If you need the funds, there are other options. A personal loan (as you have already seen) or some P2P funding could work out cheaper and more flexible than HSBC for a specific amount for a specific purpose / timeframe
That said, I can see some of the things that are making the bank raise it's eyebrows. None of this is a criticism OP, but just a view from a different perspective
The business has a 10 year history, but it's relationship with some key suppliers doesn't include credit terms (where such terms would clearly be beneficial). Why not?
Also, after 10 years of steady(*) trading history with increasing profits every year, now having reached around £264k annual gross margin, the business doesn't have the resources on hand to cover a £15k purchase of equipment. Unless that was to replace a business critical piece of equipment that suddenly and unexpectedly destroyed itself outside warranty, could that purchase not have been planned for?
(*) Steady interpreted as increasing, but not by some massive multiple each year
Also, after those same 10 years of trading, the business needs an extension to it's overdraft to buy xmas stock. Xmas has been on the same date for every one of those last 10 years and the need for season specific stock can't be a surprise on the 11th time around, can it? Why didn't the business put aside (some of) the profit from previous xmas sales to cover future stock purchases?
And now, as well as already having a £60k secured facility with the bank, HSBC is going to find out that the company also had to borrow money from the Director who, in turn, had to borrow that from another bank in order to be able to lend it to the company.
HSBC will have options to lend money at what it perceives to be lower risk.
A relationship manager for SMEs at a large bank like HSBC has no freedom to do anything other than tap numbers into his laptop and wait to see what the computer says. If it says no, there is no way to realistically challenge or override that. If it says yes, but with conditions, the RM has very little chance of removing those condtions.
If you need the funds, there are other options. A personal loan (as you have already seen) or some P2P funding could work out cheaper and more flexible than HSBC for a specific amount for a specific purpose / timeframe
That said, I can see some of the things that are making the bank raise it's eyebrows. None of this is a criticism OP, but just a view from a different perspective
The business has a 10 year history, but it's relationship with some key suppliers doesn't include credit terms (where such terms would clearly be beneficial). Why not?
Also, after 10 years of steady(*) trading history with increasing profits every year, now having reached around £264k annual gross margin, the business doesn't have the resources on hand to cover a £15k purchase of equipment. Unless that was to replace a business critical piece of equipment that suddenly and unexpectedly destroyed itself outside warranty, could that purchase not have been planned for?
(*) Steady interpreted as increasing, but not by some massive multiple each year
Also, after those same 10 years of trading, the business needs an extension to it's overdraft to buy xmas stock. Xmas has been on the same date for every one of those last 10 years and the need for season specific stock can't be a surprise on the 11th time around, can it? Why didn't the business put aside (some of) the profit from previous xmas sales to cover future stock purchases?
And now, as well as already having a £60k secured facility with the bank, HSBC is going to find out that the company also had to borrow money from the Director who, in turn, had to borrow that from another bank in order to be able to lend it to the company.
HSBC will have options to lend money at what it perceives to be lower risk.
Thanks for the outside view, I've mulled over that for a couple of days and I can see some errors in the way I perceive the business. I do indeed draw too much profit and perhaps I should keep more cash at hand.
In my head I was thinking, I need the money to import the stock, but the stock is what produces the takings, and this stock give me the highest margins, so what's the banks problem?
The 15k loan was to install warehouse heating and cardboard baling plant, I wanted to spread the cost over 3 years, I thought that's what most businesses do for such equipment? Staff were leaving due to no heating, and dealing with waste cardboard was getting expensive to fold down, and pay someone to remove it.
I saved the company money by turning down HSBC's higher interest offer and taking a 3% personal loan for the company via directors loan account.
I could have taken HSBC's offer and kept the liability in the company but their stance pissed me off, after the higher rate offer he told me if I borrowed an extra 10k, only then could he bring it down to 5.9%. Figure that one out.
To answer some of the other questions, I buy the imports from a UK agent, I pay in Sterling upfront, 8 weeks later my containers arrive. The prices paid are landed, so duty, bonding etc isn't relevant to me.
All my UK suppliers give me end of following month terms, furthermore i settle my biggest 3 UK suppliers with company purchase card, extending credit by a further 50 days. Stock I bought in January would be paid 20th April when the card company debit my current account the full card balance.
All sales are credit to my current account within 5 days.
I'm on standard VAT acccointing.
Considering the above sales and purchase terms, I can see how this looks so it would be a good idea to build up more cash?
DSLiverpool: Chambers of commerce, how have you found them, any good? Why is the advice free?
Thanks.
In my head I was thinking, I need the money to import the stock, but the stock is what produces the takings, and this stock give me the highest margins, so what's the banks problem?
The 15k loan was to install warehouse heating and cardboard baling plant, I wanted to spread the cost over 3 years, I thought that's what most businesses do for such equipment? Staff were leaving due to no heating, and dealing with waste cardboard was getting expensive to fold down, and pay someone to remove it.
I saved the company money by turning down HSBC's higher interest offer and taking a 3% personal loan for the company via directors loan account.
I could have taken HSBC's offer and kept the liability in the company but their stance pissed me off, after the higher rate offer he told me if I borrowed an extra 10k, only then could he bring it down to 5.9%. Figure that one out.
To answer some of the other questions, I buy the imports from a UK agent, I pay in Sterling upfront, 8 weeks later my containers arrive. The prices paid are landed, so duty, bonding etc isn't relevant to me.
All my UK suppliers give me end of following month terms, furthermore i settle my biggest 3 UK suppliers with company purchase card, extending credit by a further 50 days. Stock I bought in January would be paid 20th April when the card company debit my current account the full card balance.
All sales are credit to my current account within 5 days.
I'm on standard VAT acccointing.
Considering the above sales and purchase terms, I can see how this looks so it would be a good idea to build up more cash?
DSLiverpool: Chambers of commerce, how have you found them, any good? Why is the advice free?
Thanks.
cheekymeerkat said:
I buy the imports from a UK agent, I pay in Sterling upfront, 8 weeks later my containers arrive. The prices paid are landed, so duty, bonding etc isn't relevant to me.
I'd say it might be relevant in terms of cashflow, which seemed to be the problem you were trying to solve with the £60k 
cheekymeerkat said:
I'm on standard VAT acccointing.
May still be worth running the numbers - making a change to cash accounting (assuming your turnover will stay reasonably constant for a while) might pay for your xmas stock. The downside is that (as I've noticed you t/o figure), you might then have to switch back to standard accounting rather quickly, which would undo all the good work and need a slug of cash down the road.Gassing Station | Business | Top of Page | What's New | My Stuff