Meadowbank Retail: Working Capital and Supplier Terms
Meadowbank Retail is a UK fashion retailer with revenue of £80m and a gross margin of 38%. Its cash conversion cycle has lengthened: inventory days 95 (was 70), receivable days 12 (unchanged), payable days 45 (was 60). The company has a £10m overdraft at 8.5%, currently drawn to £8.2m. A key supplier offers a 2% early-settlement discount for payment in 10 days instead of 60. The finance director wants to stretch payables to 90 days to release cash, but the supplier has warned that late payment will trigger a credit hold. Seasonal peak stock requires an extra £6m in October, and the bank has signalled it will not increase the overdraft.
1. Quantify the cash tied up in the lengthening cycle and assess the supplier discount.
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Cash conversion cycle. CCC = inventory days + receivable days − payable days.
- Current: 95 + 12 − 45 = 62 days.
- Previous: 70 + 12 − 60 = 22 days.
Cash impact. Daily cost of sales = £80m × 62% / 365 = £49.6m/365 ≈ £135,900. The 40-day deterioration ties up 40 × £135,900 ≈ £5.44m. That explains most of the £8.2m overdraft draw.
Supplier discount. Terms 2/10 net 60. Cost of giving up the discount = (2/98) × (365/50) = 2.04% × 7.3 ≈ 14.9% annualised. That is well above the 8.5% overdraft rate, so taking the discount is value-creating: borrowing at 8.5% to pay early saves 14.9%. On, say, £20m of annual purchases, the discount is worth £400,000 gross, against extra financing cost of about £20m × 8.5% × 50/365 ≈ £233,000 - a net gain of roughly £167,000.
Stretching payables. Moving to 90 days releases 45 × £135,900 ≈ £6.1m, but at the cost of the discount (14.9%) and credit-hold risk that could halt supply entirely. The discount analysis shows paying late is expensive.
Conclusion. Take the discount where cash allows; stretching to 90 days is a false economy.
2. Recommend how Meadowbank can fund the £6m seasonal peak without breaching its overdraft limit.
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Problem framing. The overdraft is £10m, drawn £8.2m, leaving only £1.8m headroom against a £6m peak need - a £4.2m gap. The bank will not extend, so the company must release cash internally or use alternative instruments.
Options.
- Inventory reduction. Cutting inventory days from 95 to 80 releases 15 × £135,900 ≈ £2.0m. This is the highest-value lever because it also reduces markdown risk in fashion, where obsolescence is severe.
- Invoice discounting/factoring. Receivables are only 12 days (£2.6m), so the release is limited - perhaps £2m at 80% advance. Useful but not sufficient alone.
- Seasonal trade finance or stock facility. A secured inventory facility of £3m against peak stock, priced at base + 3%, bridges the gap without touching the overdraft.
- Supplier terms. Negotiating extended terms for the peak season only, or taking the 2% discount on high-turn lines, balances cost and cash.
- Phasing purchases. Order peak stock later or in tranches so the cash outflow is compressed into fewer weeks.
Recommendation. Combine inventory reduction (£2m), a £3m stock facility, and tighter purchase phasing. This covers the £6m peak with margin. The FD should also build a 13-week cash forecast and agree a covenant/overdraft headroom report with the bank. Stretching payables to 90 days should be rejected: the 14.9% effective cost and credit-hold risk outweigh the cash release.