Developing a Turnaround Plan

The holiday season is over. Those record orders and sales days have finally come to an end. You are feeling optimistic about the season ending but then—reality sets in! You now find your company very short on cash. What do you do? Where do you turn? How can your company continue to operate?

Welcome to the dilemmas of the mail order catalog business! Post-holiday rush is the time of year that many catalogers find they need to implement a turnaround plan to ease under-capitalization.

Under-capitalization is a common problem among small- to medium-sized catalog companies, especially in times of low activity when bottom-line losses are rampant. It can even plague larger businesses, such as J. Peterman & Co. A large percentage of mail order catalog companies simply do not have enough working capital to operate all year round. Considering the profitability of a typical consumer catalog company is between 5 percent and 6 percent before interest and taxes, one bad year can be devastating.

Without a strong personal financial statement, financing a catalog company can be very difficult. An entrepreneur’s personal financial situation can be used to guarantee any and all loans to the company. Financing is especially difficult to obtain because catalog companies have few “hard” or tangible assets to use as collateral, such as machines or equipment of any value. Of course, your company’s inventory is its single largest asset. But your company can’t buy the merchandise without cash. And, unfortunately, most lending institutions do not consider your most valuable asset, the house file, when making loans. At best, banks might extend a token amount of credit toward the list, but it would not begin to approach the true value of your company’s customer file.

From the banks’ perspective, a house file is a “soft” asset and is of very little value to them. Although it is critical to the continued operation of your business, it has little liquidation value if your company were to fail.