Ashcombe Retail: Closing a Seasonal Funding Gap
Ashcombe Retail turns over $60m and is highly seasonal: the September stock build pushes the cash balance to a forecast low of −$2.6m against a $2.0m overdraft. Purchases are $42m a year on 30-day terms, of which 35% carry a 1.5% settlement discount for payment within 30 days. Debtor days are 62 against a sector norm of 48; inventory is $7.2m and the buyers want it higher before peak. The bank will raise the limit to $3.0m for twelve months at 9.5% plus a 0.8% arrangement fee on the increase, on condition that no dividend is paid and the two owners give personal guarantees. The finance director favours simply stretching creditors to 45 days. Six months remain before the peak build.
1. Quantify the cash released and the true annual cost of each lever available to Ashcombe, and rank them.
Read the worked answer
Gap to close: 2.6 − 2.0 = $600,000.
Lever 1 - Bank facility increase (+$1.0m)
- Arrangement fee: 0.8% × 1,000,000 = $8,000.
- Interest: roughly $600k drawn for about six months = 600,000 × 9.5% × 0.5 ≈ $28,500.
- Total ≈ $36,500 for the season. Marginal cost of the money drawn ≈ 9.5% a year.
- Non-financial price: dividend blocked, personal guarantees, and the limit is a fixed commitment that must be renegotiated.
Lever 2 - Debtor days 62 → 50
- Daily sales = 60m ÷ 365 = $164,384. Twelve days = $1.97m released; four days = $658k.
- Cost: near zero if achieved through invoicing discipline, credit control and a settlement discount - but it takes months and can cost sales at the margin.
Lever 3 - Stretch creditors 30 → 45 days
- Release: 42m × 15 ÷ 365 = $1.73m.
- Cost: the 1.5% discount on 35% of purchases is worth 42m × 0.35 × 0.015 = $220,500 a year. Against $1.73m of cash that is roughly a 12.8% effective annual cost - more than the bank.
- Additional cost: supply security. Stretching unilaterally into the peak build, when stock availability is what generates the season's revenue, is the riskiest possible timing.
Lever 4 - Inventory −8% ($576k)
- Release roughly $576k, but at the cost of fill rates in the peak. This trades revenue for cash, the worst possible exchange in a seasonal retailer.
Ranking by cost per dollar of cash: bank facility (~9.5% plus covenants) < debtor process improvement (near zero, but slow) < stretching creditors (~12.8% plus supply risk) < inventory cuts (revenue risk).
2. Recommend a package to the board, taking account of lead times and the conditions attached to the bank offer.
Read the worked answer
Recommendation: secure the facility now, fix the structural problem in parallel, and do not stretch creditors.
Why the facility is the core of the package
- It closes the $600k gap in full and is available now; the other levers cannot be relied on within six months. Debtor-day improvement from a 62-day starting point is a 6–9 month programme, and unilateral creditor stretching would land exactly when stock is being bought.
- At roughly $36,500 for the season it is the cheapest option by a wide margin - the creditor route costs $220,500 a year, six times as much, and is permanent rather than seasonal.
Negotiate the conditions, do not just accept them
- Ask for the personal guarantee to be limited to the peak period or to the incremental $1.0m, not the whole facility; a guarantee that covers the existing $2.0m transfers risk the owners are not being paid for.
- If the guarantee cannot be limited, take $800k rather than $1.0m once a debtor workstream is committed - the fee and the risk exposure both fall, and $600k is the actual need.
- Accept the dividend restriction for twelve months; it is a real cost but not a liquidity one, and it signals discipline to the bank.
Parallel actions before September
- Target debtor days 62 → 54 by month four (worth $1.3m), driven by invoice-on-despatch discipline, a dunning process and a 2%/30-day settlement option for the top twenty accounts. This reduces reliance on the facility next season.
- Renegotiate terms with the 65% of suppliers without settlement discounts - ask for 45 days there only. That releases cash at no discount cost and keeps the discount-earning suppliers on 30 days.
- Hold inventory; do not cut into the peak.
Arithmetic check: facility $600k drawn plus 8 days of debtors ($1.3m) gives headroom against the September low, and next year's peak is funded from operations rather than from a guarantee.
3. What control and monitoring framework should the board put in place so that this gap does not recur?
Read the worked answer
The underlying failure is visibility and ownership, not the overdraft.
1. Thirteen-week rolling cash forecast, weekly The gap appeared with six months' notice only because someone looked. A rolling thirteen-week direct-method forecast (receipts by customer, payments by supplier, payroll, VAT, capex) owned by the FD, reviewed weekly against actual, with a stated variance trigger - say, 10% adverse on any week - converts a seasonal surprise into a managed curve.
2. A seasonal funding plan agreed with the bank in advance Negotiate a committed seasonal facility with a peak and a clean-down date written into the agreement, rather than an annual limit that gets breached. Committed is the operative word: an uncommitted limit can be withdrawn exactly when it is needed.
3. Working-capital targets on the scorecard
- DSO with a named owner and a monthly trend, not just a year-end figure.
- DPO split between discount-earning and non-discount suppliers, so nobody 'improves' cash by giving away $220k of discounts to save $36k of interest.
- Inventory expressed in weeks of forward demand, with the peak build plan signed off by merchandising and finance jointly.
4. Test every cash lever on an annualised-cost basis Require any proposal to release cash to state the effective annual cost (as in the previous task) and whether it is reversible. That single rule would have killed the creditor-stretching idea at the first meeting.
5. Covenant and liquidity headroom report to the board monthly Show headroom against each covenant and against the facility at the forecast peak, with a sensitivity for a 10% sales shortfall and a 10-day debtor slippage. Boards approve a facility; they should also see what breaks it.