by Robert S. MacDonald Appraisers, lenders and financial analysts have

Transcription

1 by Robert S. MacDonald Appraisers, lenders and financial analysts have been calculating inventory-turnover ratios for the last 100 years. The ratio is calculated by dividing Cost of Goods Sold by the ending inventory then dividing the quotient into the number of days in the period, e.g. 365 days. Today, lenders can use digitally-reported data and calculate inventory turns by categories, classes or even standard stock keeping units. This provides the lender much more detailed and useful analysis of inventory. Base case: Nonseasonal inventory The reader s attention is directed to Exhibits 1, 2 and 3 beginning on page 59. Most inventory appraisers and lenders value more highly inventory that turns rapidly than inventory that turns slowly. The logic behind their thinking is that the market favors inventory with a high turnover and criticizes slow-turning inventory. In Exhibit 1 the appraiser has valued fast-turning inventory at 70 percent and slowmoving inventory at 30 percent. Contrasted against seasonal inventory Exhibit 2 shows the inventory at the start of the new season with new model inventory that shows little or no turnover because there are little or no sales for the new model items. The appraiser, knowing that this slow-turning inventory is brand new, has valued it at 70 percent. Conversely, in Exhibit 3, carry-over inventory from last year s seasonal inventory shows high turnover relative to last year s sales, but in that case the appraiser valued that inventory at a low 10 percent because she knew that this was carry-over inventory. Seasonal carry-over apparel inventory has much risk because of associated style and fashion factors such as color, pattern, texture and tailoring. By comparison, the (Continued on page 58) 56 THE SECURED LENDER MARCH/APRIL 2003 VOLUME 59 NUMBER 2

2 Lenders cannot track seasonal carry-over inventory in a truly effective manner without using digital inventory-reporting. appliance inventory shown in Exhibit 1 has very low seasonal, style and fashion risks. Preseason inventory versus postseason carry-over inventory At first glance, Exhibits 2 and 3 appear to be identical and they are except for the Values. The Item Numbers, Descriptions, Unit Amounts and Costs are, in fact, identical, but Exhibit 2 shows a preseason inventory while Exhibit 3 shows a postseason carry-over inventory. Observe how the point in time affects the value of the same inventory. Exhibit 2 shows many items with no historical sales units and high values while Exhibit 3 shows many items with high-inventory turns, but low values. Lenders need to guard against inventory over-advances by demanding loan paydowns on carry-over inventory. Exhibits 1, 2 and 3 are fictional examples of the principles described here. However, a real-life case study is summarized below and it demonstrates in detail why lenders need to monitor seasonal inventory collateral in a more sophisticated and relevant manner. Robert S. MacDonald is a graduate of Alfred University. He is a marketing representative for Plant & Machinery, Inc. and the owner operator of AVS, Corp., Stamford, Connecticut. A case study of an actual orderly liquidation of seasonal carry-over inventory Recently, a company was requested by a secured lender to foreclose on an inventory of casual men s clothing imported from India and Sri Lanka. It took possession of the goods in a Stamford, CT warehouse from the lender s borrower. After several months of litigation, the lender gave the company the green light to sell this carry-over inventory of men s casual clothing which was labeled, plastic-bagged and out of season. The goods were marketed to all the major discount retailers. None had any interest in purchasing this inventory. These major discount retailers were interested in only purchasing recognizable brand names. Some sales interest was found at a different level of trade. The goods were sold to a company operating a chain of salvage stores in Mississippi for $1.00 per item. The sales prices printed on the plastic-packaged garments ranged from $8.00 to $20.00 each. That means about ten cents on the cost dollar. This is why lenders need to guard against loan advances on carryover seasonal inventory through digital inventory-reporting and line-item turnover analysis. This number-crunching, however, has to be combined with a thorough understanding and/or diligent study of the borrower s industry and the borrower s business strategy in that industry. The need for digital inventory-reporting Lenders cannot track seasonal carry-over inventory in a truly effective manner without using digital inventory reporting. There are several additional advantages of digital reporting over paper inventory reporting but the most significant reason is the increased level of confidence that the lender can gain from the reliability of the digital data. With paper reporting, the lender does not even know if the totals Foot correctly. The lender should request the borrower provide reports with item labels that communicate the month and year purchased and/or manufactured so that report readers can better track and understand the inventory items. The lender should also instruct its field examiners to test check these dates by a random sampling of purchase invoices. In addition, the field examiners should test check historical unit sales for accuracy and reliability. A more subtle, but highly significant advantage, of digital reporting over paper reporting is the ability of the lender s account executives and field examiners to carry this digital data home in their lap-top computers from their offices. By so doing, these lending professionals are able to achieve much higher levels of understanding of their borrowers businesses and collateral. 58 THE SECURED LENDER

3 EXHIBIT 1 NONSEASONAL INVENTORY Item No. Item Units on Hand Cost Extended Unit Sales # Days OLV % OLV $ Description Cost Sales YTD 101 APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , , APPLIANCE , ,000 4,200,000 34% 1,444,000 (Continued on page 60) MARCH/APRIL,

4 EXHIBIT 2 SEASONAL INVENTORY START OF SEASON Item No. Item Units on Hand Cost Extended Cost Unit Sales # Days OLV % OLV $ Description Sales YTD 101 SHIRT A , , SHIRT B , , SHIRT C , , PANTS A , , PANTS B , , PANTS C , , SHORTS AA , , SHORTS BA , , SHORTS CA , , SHIRT AA , , SHIRT BA , , SHIRT CA , , PANTS AA , , PANTS BA , , PANTS CA , , SHORTS AA , , SHORTS BA , , SHORTS CA , , SHIRT AB , , SHIRT BB , , SHIRT CB , , PANTS AB , , PANTS BB , , PANTS CB , , SHORTS AB , , SHORTS BB , , SHORTS CB , , SHIRT AC , , SHIRT BC , , SHIRT CC , , PANTS AC , , PANTS BB , , PANTS CC , , SHORTS AC , , SHORTS BC , , SHORTS CC , ,000 4,200,000 63% 2,664, THE SECURED LENDER

5 EXHIBIT 3 SEASONAL CARRY-OVER INVENTORY END OF SEASON Item No. Item Units on Hand Cost Extended Unit Sales # Days OLV % OLV $ Description Cost Sales YTD 101 SHIRT A , , SHIRT B , , SHIRT C , , PANTS A , , PANTS B , , PANTS C , , SHORTS AA , , SHORTS BA , , SHORTS CA , , SHIRT AA , , SHIRT BA , , SHIRT C A , , PANTS AA , , PANTS BA , , PANTS CA , , SHORTS AA , , SHORTS BA , , SHORTS CA , , SHIRT AB , , SHIRT BB , , SHIRT CB , , PANTS AB , , PANTS BB , , PANTS CB , , SHORTS AB , , SHORTS BB , , SHORTS CB , , SHIRT AC , , SHIRT BC , , SHIRT CC , , PANTS AC , , PANTS BB , , PANTS CC , , SHORTS AC , , SHORTS BC , , SHORTS CC , ,000 4,200,000 17% 696,000 MARCH/APRIL,