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Inventory Financing for the Holiday

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.

Budgeting is a process, and as such demands continuous improvements. The bike shop is in a difficult situation, but must find the cash somewhere in order to sell more bikes this holiday season. I would recommend that a stronger budgeting process may have allowed the owner to save more money over the slower months to accommodate for the loss of the line of credit.

Essentially, the line of credit was withdrawn in the spring, meaning the entire summer busy season the owner was aware of the need to stockpile cash and/or inventory for the holidays. As such, the case highlights the need not only for strong budgeting to allow the owner to resolve the situation, but for the need to constantly update budgets. The owner, given that the situation has been expected for six months, has essentially compounded an already difficult situation by not adjusting his budget to account for the lack of credit.

The story also highlights the difficulties of forecasting cash flow in a young business. This new, growing business has plugged its profits into building the business. That this has now become a cash flow problem illustrates the need for better cash flow forecasting. But in a growing business demand levels can be difficult to anticipate. If the owner had a more flexible budget this would perhaps have been alleviated. A variety of cash flow scenarios should have been developed so that the owner was aware of what possibilities lay ahead and could make longer-term decisions as a result..

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