Forums: Discussions for entrepreneurs and small business.

My pleasure (the help)!
Umm, you mentioned that it was for a bank, right? So, you are trying to demonstrate to them that you can service the debt, right? You need to present a model that adds the product line into your sales figure, and to be consistent, you must also model the loan! otherwise, no money, no inventory, no sales, OK?
It also says to them that the loan will be coming from somewhere, assuming that the numbers support it, and so it says to the bank - if you want the business from us, grant the loan!
Model both, and check the debt servicing ratios for your negotiating position. See the sections in the guide that talk about making presentations to loan officers and credit committees. As for the business performance without the new product line and the loan, the business must have financial statements from prior periods, right? That is what the bank needs for that history. The model is preparing what is called a pro-forma projection (what happens if we do this, that, and the other in the future).
The business plan is typcially a write-up of the planned actions and objectives, what the keys to competitive success are, and the numbers that that scenario will produce.
Oh, and keep it short and to the point. Readable in ten minutes, no more.

Mike

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Not for me to advise you guys on what form of debt you are going after, snce I don`t know much about your specific business or your circumstances. But in general, Marshall`s point is a good one in that the flexibility of the revolving line can be cheaper. And often, inventory can collateralize a fair chunk of loan, say as much as 60% of the cost value of the inventory...

By the way, you mentioned that your banker suggested you com here to get the model, so I am curious - any idea how he knew about it?
Anyway, keep me posted!

Mike

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Crazy

We have finished the basics for the business plan spreadsheets, and have the projected statements. We went over the monthly sheets though, and we think that the numbers are just a little too aggressive. What is particularly a problem is the sales of seasonal product lines out of season. I read over the guide material, but am wrestling a bit with it. See the inventory bounces well in advance of sales, and needs to taper off sharply part way through the seasons (thinking winter gear mostly). There are also close-outs of inventory at price reductions and so on that go on at those times. Any guidance here you can give me. Think we are getting close though, at least we have a most of the questions  and some of the answers. I`m enjoying this, although I`m not sure my father is!
Anyway, thanks for the assistance so far.

Kurt

Kurt, if you are still checking in, here are some pointers on seasonality...

There are multiple sources of seasonality. Periods of several months based roughly on the climate and weather. There are recurring distortions, such as an annual holiday. There are seasonalities within weeks. Take the worst one for handling. Suppose you have a business that does a lot of its business on Saturdays (a bar perhaps). In order to compare periods properly, you need to determine how many Saturdays in the month. Suppose March last year had 5 Saturdays, and this year, March has only 4 Saturdays. The results for the month will be very different in comparing one year to the next. now if you are trying to determine what growth looks like year over year, if you do not take this into account, you will have a problem.
Deciding whether to use weeks or months is something you need to do up front. Many businesses make do just fine tracking seasonality on a monthly basis. Only if you have peculiar circumstances should you need to use weeks. The fact is that since most small businesses reporting systems are from accounting, and since accounting tends to use months, you are best to stick to months. In some businesses, though very few, every month has an equal share of the years sales. Most show some consistent variance. Now you are trying to model a retailer of sports related consumer items. All sports are seasonal (except perhaps swimming and workout gear). I would guess that if you are selling hockey gear, the season for retail would start about in September, show a peak in October, and decline around January, before completely dying in April. So instead of a straight 8.3% per month every month, you have 4 months without any sales. That means the average of the other months would be 100% divided by 8 months, or 12.5%. But we also are guessing that September is twice as good as the other months - (25%), while January is about 25% below average - (10%), and February through April is about 50% of normal - (6.25%). That leaves about 47% for October through November, more about 15.4% for each. Your seasonality would look like, from January through December, 10%, 6.25%, 6.25%, 6.25%, 0%, 0%, 0%, 0%, 25%, 15.4%, 15.4%, 15.4%.  
Lastly, obviously each line of sports stuff will have a different seasonality curve - to check your numbers, check your sales of stuff last year if you have it broken down by product. If you don`t, check your purchases instead, and adjust for the inventory holding period.

It is important that you do this exercise, because it has a big impact on your cashflow, and since you are working on funding, the lender will want to know about seasonal fluctuations. You want them to know, too, since you don`t want them freaking out if you don`t sell a lot of water-skiiing gear in January.
Hope that helps.

Mike

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Thanks for the info crazydiamond. we finished the spreadsheets and the plans  on Monday, and he took them up on Tuesday to the banker. Oh, by the way, you asked about the banker knowing about the model, and apparently he had another client that used it, so he told us about it.
Anyway, the meeting went really well. They have agreed to extend us the amortised loan for the refixturing for the new line, and have also agreed to provide a revolving line based on a floor, plus a percentage of inventory.
They really liked the operating stats and the cycle stuff. All we needed to give them was the model excerpts that you reccommended in the guide, 2 years of statements, and the description of the new product line. It only took 2 days to get it approved. I just earned a lot of brownie points for working on this.
By the way, I stopped off and talked to the guy that runs the business course I took. He is also interested in using it for his classes - would there be any problem if he did that. I told him that it would be valuable?
Anyway, thanks for all of the assistance

Kurt