Seasonal Sales Instructions After reading Chapter 14 describ

Seasonal Sales

Instructions

After reading Chapter 14, describe what you think the seasonality scenario would be for one year, for a business you could imagine starting. Explain how you think the cash flow will be affected over the course of the year.

Word count requirement: A minimum of 100 words for this discussion.

Chapter 14 CASH FLOW AND TAXES

At age 28, David Kendricks started his own recording label, Kickin’ Records. He began by searching for and producing hip-hop artists from his hometown of Newark, New Jersey.

“If you do your job well, the last thing you have to worry about is money, just as if you live right, you will be happy.”

—Edwin Land, founder of Polaroid

David invested $25,000 in his new business. He saved the money by working two jobs for five years. He set up a Web site to sell his CDs. He bought a business telephone number with voicemail, and created and printed his own stationery and business cards. He regularly invests time from eight in the evening until three in the morning looking for groups to sign to his recording label.

David has been spending about $100 a night on cover charges and drinks at nightclubs, and tickets for concerts, including transportation. He has found, however, that the groups at the better clubs and concerts are already signed and have producers. David has had no sales, because he has not yet produced a CD. After six months, he is almost $20,000 in debt. David hasn’t kept a close watch on his cash flow, and this has threatened the existence of his business.

Performance Objectives

1. Understand the importance of cash flow management.

2. Know the difference between cash and profits.

3. Read a cash flow statement.

4. Create a cash budget.

5. File appropriate tax returns for your business.

Cash Flow: The Lifeblood of a Business

Cash is the energy that keeps your business flowing, the way electricity powers a lamp. Run out of cash, and your business will soon go out like a light. Without cash on hand, you will not be able to pay essentials, even while the income statement says you are earning a profit. If your phone is cut off, it will not matter what the income statement says. The success of your business will depend upon cash, from start-up through its entire existence. Cash is essential for the initial investment, ongoing operations, and growth. Managing cash is more critical than managing sales, because sales without cash receipts are a recipe for disaster. Cash truly is the lifeblood of a business.

Performance Objective 1

Understand the importance of cash flow management.

The income statement shows you what the situation is with sales and profits over a period of time. It tells you how much revenue has come in and how it relates to the cost of goods sold and operating costs. The balance sheet is a snapshot of your business. It shows your assets and liabilities and net worth at one moment in time. Each of these statements and the associated ratios is important, but without a firm handle on the cash situation, business success will be elusive.

The Income Statement Does Not Show Available Cash

Once you start a business and are using the accrual method of accounting, however, you will notice that, sometimes, even when the income statement says you are making a profit, you have no money. There is often a time lag between making a sale and getting paid. If you make a sale, and the customer promises to pay you in a week, the sale is recognized on the income statement immediately, but you will not have the cash until the check is received, deposited, and available at the bank. Also, there may be a lag between paying for labor and/or materials and receiving payment for the finished goods. If a company is using the accrual method of accounting, it records sales when goods are shipped/delivered, even though payment has not been received. Thus, a company may show a profit and have a negative cash flow. Cash and profit are not the same.

BizFacts

You can calculate your ongoing cash balance by subtracting cash disbursements from cash receipts. You should never have a negative cash balance.

For all the good information and guidance a monthly income statement can provide, you cannot base your business’s daily operations on using the income statement alone. You will also need a cash flow statement that summarizes the cash coming into and going out of the business over a specified time frame.

cash flow statement

financial report that shows the money coming into and going out of an organization.

Performance Objective 2

Know the difference between cash and profits.

You can calculate your cash balance by subtracting cash disbursements from cash receipts, as you do when balancing your checkbook. Your goal is never to have a negative cash balance. A negative balance means that you are overdrawn in one or more of your bank accounts. This will reflect poorly on your banking relationships, can trigger the accumulation of fees and penalties, and result in bounced checks to critical vendors and the like. More basically, a negative cash balance means that there are problems in your cash flow.

Author William Stolze calls the cash flow statement “By far the most important financial control in a start-up venture.”1 The cash flow statement records inflows and outflows of money as they occur. If a sale is made in June, but the customer does not pay until August, the cash flow statement will not show the revenue until August, when the cash “flows” into the business. If you are keeping your accounting records on a cash basis, you would not show the sale on the income statement until you received payment. If you use the accrual method, the sale will appear on the income statement in June, but not in the cash flow statement until August.

Step into the Shoes... King C. Gillette Faces a Cash Crunch

King Gillette was a traveling salesman for 28 years. In his spare time, he tried to invent a successful consumer product. He invented all kinds of gadgets that did not pan out, but in 1885, when he cut himself shaving with his dull, straight razor, inspiration hit. Gillette thought of a disposable safety razor.

Gillette and a partner eventually got financing together and launched their business. The future seemed bright, but soon the company was $12,500 in debt. By 1901, even though people were excited about the product, “We were backed up to the wall with our creditors lined up in front waiting for the signal to fire,” Gillette wrote later.2

Gillette convinced a Boston investor to put money in the company, and by the end of 1904, his company was producing a quarter million razor sets per year. This is an example of how crucial an infusion of money can be to a business. A temporary cash crunch nearly destroyed a company that is now more than a century old.

1William Stolze, Start Up: An Entrepreneur’s Guide to Launching and Managing a New Business (Franklin Lakes, N.J.: Career Press, 1994), p. 96.

2Russell B. Adams, King C. Gillette: The Man and His Wonderful Shaving Device (New York: Little, Brown, 1978).

Solution

Seasonality is a pattern occuring in the sales over the year and repeats the pattern every year. As shown in the above example, David has started new business of recording label. Before investing cash in his business, he has to study the seasonal trends in this business. So that he will be ready for any seasonal cash crunch and have alternate plans to have excess cash during the period where the sales is low during the year. Artist busy season would probably be during festival times. And so we have to advertise more during those period of time and bring in cash to invest in marketing his record label. Partnering with someone else would be a good option to avoid risk and have a second hand when cash is needed.

After making research about the seasonal trends and cost involved in marketing and other fixed and variable cost, the value of the company has to be compared with other similar business to understand the value of the company.

The seasonal trend differs for each business. This can be compared to mango sales which is high during the summer and very low during the winter. Clothes apparels sales will be high during festival time and average during other time over the year. We have to study the trends before investing cash in any business.