Seasonal businesses are scary, especially product-based seasonal businesses with long finance cycles.

I cut my financial teeth in the bicycle industry back in the days when Univega was one of the leading U.S. brands. My mentor was the late Ben Olken, whose retail store, The Bicycle Exchange, was a Harvard Square landmark for more than 50 years.

Recognizing the limitations inherent in being a single-store retailer, Ben had established his own distribution company to import and market Univega bikes throughout the Northeast. The business grew steadily during the late ’70s and’80s, to a point at which Ben’s company was responsible for the distribution of more than 30,000 bikes a year to 200-plus retailers, plus three little Howes and their father.

At that time, the old-line U.S. manufacturers- Schwinn and Huffy and others – were losing market share to new brands sourced from Japan and Taiwan, whence Ben Olken, Inc. contracted its production. Then, as now, the primary benefit of outsourcing overseas, given competitive quality, was price – especially with the yen at220-240to the dollar. The drawback was lead time: the manufacturers wanted to know in November and December what we were expecting to sell in April, May, and June. They also wanted our purchase orders by the end of January, accompanied by a bank letter of credit, assuring that they would get paid as soon as they shipped the product.

Their receipt of the P.O. and L/C started the manufacturing(4-6 weeks) and ocean freight cycle (4weeks) – product ordered in mid-December hopefully arrived in early March. If our salespeople had been successful with their retailer accounts, most of those bikes went out the door by the end of March for the start of the spring retail selling season in April.

In a good year, customers would snap up the new models and the retailers would be starting to pay us by early June. So Olken’s company regularly had a”finance cycle” of six months from the commitment of the L/C until Ben finally got paid on his invoice. With over60% of his annual sales occurring in March through June (a month ahead of the retailers’ peak), Ben had a financing challenge.

Fortunately, a succession of local banks was equal to the challenge. As each container of bikes “hit the water” in East Asia and the letters of credit were presented for payment by our vendors, the bank advanced us 50% of the landed value (including duty, freight, and insurance) of the inventory in the shipment. Then, once it was processed through the warehouse in Stoughton and sold to a retailer customer the advance rate (the amount eligible to be loaned) went up to 80% of our invoiced price on each bike. This “asset-based lending” was critical to Ben Olken’s business.

At key intervals in the spring, the Company often had bank obligations that exceeded half its annual revenue. An extended winter (think April snowstorms) or a succession of rainy weekends in April and May could clog the pipeline, leaving the retailers with unsold inventory and Olken with bikes coming (in) but not going (out). At the same time, the financing “availability” was usually contingent on being able to move from 50% inventory financing to 80%receivable financing to 100% payment by our customers (80% of which paid down the bank loan), all within a60-90 day period.

With so many variables to keep track of -bike models, price points, letters of credit, inventory values, retailer purchases, sell-through, credit availability, loan advances- financial projections were critical. It was no coincidence that the growth of Ben Olken’s distribution business coincided with the introduction of the electronic spreadsheet.VisiCalc, then Lotus, then Excel enabled us. Instead of using13-column journal paper, pencils, and erasers to produce one master plan, which was not easily reproduced to share with the bankers, we had the newly-discovered ability to consider multiple options and for the first time to engage in “what-if” scenarios, including the bad weather nightmare, testing multiple assumptions en route to a bankable result.

Getting our bankers on the same (spreadsheet)page with us was critical to our financing, but equally important was having a financial roadmap for all of our constituents – vendors, salespeople, warehouse workers, customer service reps, and the retailers. They could see that the rainy day plan called for price cuts to move inventory. But everyone also knew that without stocking up early, the retailers ran the risk of running out of inventory in June. So, by the time that the system had to be committed to, in early February, everyone was on board except the customer.Fortunately, only the most astute of them knew that April showers brought May price cuts.

Alligator Bites

Most large commercial banks suspended making small, asset-based (inventory and receivables) loans a number of years ago. They were expensive to monitor, requiring the bank’s customer to submit monthly or even weekly “compliance certificates” attesting to the value of the underlying asset.

More importantly, the inventory and receivables often ended up with the bank’s work-out team, the liquidation specialists now known euphemistically as the”special assets” group. For many bankers, it takes only one experience trying to recoup a few cents on the dollar of dead inventory or long-overdue receivables to make them gun-shy about lending on seasonal assets when they go back to”the street.” For smaller banks which pride themselves on close customer relationships, however, an asset-based loan can still be their competitive edge.

My case in point occurred in the late ’80s with a 70- year-old Greater Boston manufacturer of men’s slippers. They made the most comfortable leather loungers one could possibly receive for Christmas or Father’s Day (bi-seasonal). Problem was, the market was mostly dead. The last person I’d seen wearing them was my father, and he’d died ten years earlier.The bank was losing faith in this venerable manufacturer to the point at which it had supplemented its pledge of inventory and receivables with a security interest in the building.We managed to collect most of the receivables, but Christmas came and went with very little reduction of inventory, followed by the real estate crash of 1990.

The angst was no longer seasonal…

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Draining the Swamp

Spend any time in a seasonal business and you quickly learn that one of the keys to success is to get pre-season commitments. Consumer product manufacturers employ a variety of incentives to entice their retailers to order early, most often using discounts and promotional premiums to get their products on the shelves. Bike retailers, however, were most often motivated by Ben Olken’s “dating game.”

Knowing that our East Asian suppliers wanted our annual production projections by the end of December, we offered our retailers “dated invoicing” during the fall. For any orders received before Christmas, we offered “Net June30″terms – no payment for six months. Even better, we would provide deep discounts for early payment: 7% by December 31; 5% by January 31; declining a point a month to a 1% discount for payment on May 31.(The prime rate ranged from 8-11% in the late ’80s.)

For a retailer buying a bike at $200 taking the standard markup of 50% and paying in December, a $100 margin suddenly became a $114 margin with the bike price discounted to$186. This typically covered the retailer’s six-month cost of capital and provided some extra margin for early-season sales promotions. For Ben Olken, Inc., it got the bikes out of the warehouse and on to the retail floor well before the season, a critical hedge to the possibility of a slow selling season.