Working capital strategies for seasonal businesses – V. K. Subramani, Chartered Accountant, Erode
Some of the textile products which have seasonal demand may have to be produced throughout the year. In such case, huge capital is required; instead, the business community can plan to manufacture just before the season and during the season. In the off-season, if they have spare production capacity,they can diversify to some other product.When they resort to manufacture the same seasonal product, assuming it is not a perishable commodity, they pump in so much of capital, and it remains idle for a long time. And, if it is from borrowed sources, it adds to the cost of production. I have come across certain businesses where the season is only four months at the most; if you add the preparatory two months, it comes to 6 months when they can have 100 per cent capacity production activity. The balance 6 months they can resort to extra product lines which will keep them dynamic and vibrant throughout the year.
What happens when business is seasonal, say for four months, but the entrepreneur resorts to manufacture all the 12 months? They pile up the stocks. If it is own capital, fine; if it is through working capital loan from financial institutions, the cost will go up. Also, the product may not meet the exact demands of the consumers during the season.In such case, the product has to be carried forward to subsequent year. The difficulty while piling up the inventory is that the cost of production or cost of carrying will eat away the profit margins for the business. This type of crude business practice should not be adapted, and I have advised a few businesses that they just do it scientifically.