4 ms·

I find it incredible that a company that on the face of it seems so robust was/still is completely at the mercy of the banks that are funding its cashflow. 1 b

I find it incredible that a company that on the face of it seems so robust was/still is completely at the mercy of the banks that are funding its cashflow. 1 bn in sales, yet the moment it misses a growth target it could easily get caught in a cashflow credit crunch and go belly up? Utter madness.

jey 16y ago
This is why businesses involving direct distribution of physical goods are, to use a technical term, "teh suck".
roel_v 16y ago
Eh? Most big retail businesses finance inventory this way. Ahold (big supermarket holding company) with a market cap of 15 billion and a revenue of a little under 40 billion almost went bust a few years ago because of a similar reason. It's too expensive for a company of that size and in that market to use its own capital for financing inventory - margins are like 3 percent, 5 percent if they're selling premium products. There's no (financial) room to keep 10% of their revenues laying around in warehouses. Besides, those that don't have credit lines from banks have them from their suppliers - with the same risks and conditions.
- dabeeeenster 16y ago
  If they make 3% profit per annum, and they have no growth, it would only take 3.33 years of profits for them to be able to finance 10% of stock...? Surely this would be a better use of capital than the enormous risk of relying on commercial paper/short term credit lines?
  - roel_v 16y ago
    What, and let shareholders wait for three years for any profits? These businesses operate on the edge - in the margin as an economist would say. They need every single bit of competitive advantage to survive. Storing capital that can be put to productive use in a warehouse is a liability, to be remedied asap. Every business has risks, credit risk is just one of the many. When managed well, there is no problem with relying on outside credit to finance short-term debts. Running a big company (or a country, for that matter) is _not_ the same as balancing a household budget. Risk is an essential part of doing business, and managing risk is one of the aspects that can give a company a competitive advantage. A few days ago there was a link here on HN about marginal advantages in game design, how the best Starcraft players thrive in environments where they are just a smidgen ahead of their opponent, and maneuver themselves in such a position, in contrast with the amateurs who want to 'win big' - have a big lead and crush their opponent in an overwhelming fashion. It's an eye-opening read, putting in words a property of winners that I never quite managed to capture myself. The theory applies to businesses equally - in a mature market, you can never be hunkered down, playing an all-defense game while you build up resources and then crush the opposition. By that time, that competition will have eaten your lunch and driven you out of business.
    - seanalltogether 16y ago
      Do you have a link to that Starcraft article?
      - roel_v 16y ago
        Took a bit of digging, finally found it in my history: http://news.ycombinator.com/item?id=1402929 http://news.ycombinator.com/item?id=1402929 .
    - Retric 16y ago
      A) Cash on hand has value. B) Banks do charge them interest on that money. So their opportunity cost = (Money * (Potential return - bank interest rate), but risk also has a cost. C) As a public company Edit:(Ahold) could sell stock and gain capital without making their numbers look bad. IMO, if there was a 5% risk of going bankrupt it's a now brainer. If it’s less than 5% they can mitigate it by keeping more cash on hand.
      - sielskr 16y ago
        "As a public company they could sell stock" (Like it says in the OP) Zappos is not a public company, and if the Zappos board had been confident that Zappos could become a public company, they would not have objected to the direction desired by the CEO.
        Retric 16y ago
        Sorry, the “they” I was talking about was Ahold. I think Zappos probably chose the correct path. As a rapidly growing company they had fewer options.
      - roel_v 16y ago
        Of course cash on hand has value. Question is how much of it is needed to optimize profit. And of course credit lines cost money. That's where the 'risk management' part comes into play. My point is that there are hundreds of people running models and doing calculations on what the optimal way to finance operations in a company of that size is. Contrary to popular opinion these people aren't stupid. It's unreasonable to, a priori, rule out financing inventories with credit, just because there is risk involved. It's about balancing pros and cons, and whoever balances it the best, wins (i.e., makes most profit, or can lower prices to gain customers and grab more market share, or buy competitors, or...) (about Ahold, without knowing the details, the liquidity problem was at the time when details of shady accounting in a US subsidiary came to light. You can't issue more stock in a few days to cover immediate liquidity problems. plus investors aren't going to be too happy when you're diluting their stock just to cover an operating loss. It's a different thing when you're doing it to raise money to expand the business.)
  - patrickgzill 16y ago
    Margins on supermarkets are much lower than you think - when A&P was doing 1.06% of sales as profit they were considered superstars for making that much. Imagine a decent sized store that does $200K over a 3 day weekend with people buying steaks, etc. Net profit for all that work, logistics, HR, etc. is about $2,000 .
brc 16y ago
And yet very, very common in the real world. For more fun and games take a look at an airline business funding one day. One hiccup with a line of credit, particularly fuel credit, can bring an entire airline down in a matter of days. The risks of funding retail lines of credit are not for the fainthearted. Get some bad purchasing going, end up with a load of junk in the warehouse that customers don't want and the business can't pay for ; the whole thing unravels very fast.
protomyth 16y ago
A lot of consulting companies got hit pretty hard when their revolving credit accounts got crunched. It is a fact of life when you are talking 30, 60, and 90 day net.
bl4k 16y ago
it is called trade finance. the world runs on it. when extremely large purchases are made between two large companies, the terms of payment can get very complicated, which is why you need banks in the middle. have you ever thought about how you would go about purchasing $1B worth of shoes? Hint: you don't put it on the company amex.

jey 16y ago

This is why businesses involving direct distribution of physical goods are, to use a technical term, "teh suck".

roel_v 16y ago

Eh? Most big retail businesses finance inventory this way. Ahold (big supermarket holding company) with a market cap of 15 billion and a revenue of a little under 40 billion almost went bust a few years ago because of a similar reason. It's too expensive for a company of that size and in that market to use its own capital for financing inventory - margins are like 3 percent, 5 percent if they're selling premium products. There's no (financial) room to keep 10% of their revenues laying around in warehouses. Besides, those that don't have credit lines from banks have them from their suppliers - with the same risks and conditions.

dabeeeenster 16y ago
If they make 3% profit per annum, and they have no growth, it would only take 3.33 years of profits for them to be able to finance 10% of stock...? Surely this would be a better use of capital than the enormous risk of relying on commercial paper/short term credit lines?
- roel_v 16y ago
  What, and let shareholders wait for three years for any profits? These businesses operate on the edge - in the margin as an economist would say. They need every single bit of competitive advantage to survive. Storing capital that can be put to productive use in a warehouse is a liability, to be remedied asap. Every business has risks, credit risk is just one of the many. When managed well, there is no problem with relying on outside credit to finance short-term debts. Running a big company (or a country, for that matter) is _not_ the same as balancing a household budget. Risk is an essential part of doing business, and managing risk is one of the aspects that can give a company a competitive advantage. A few days ago there was a link here on HN about marginal advantages in game design, how the best Starcraft players thrive in environments where they are just a smidgen ahead of their opponent, and maneuver themselves in such a position, in contrast with the amateurs who want to 'win big' - have a big lead and crush their opponent in an overwhelming fashion. It's an eye-opening read, putting in words a property of winners that I never quite managed to capture myself. The theory applies to businesses equally - in a mature market, you can never be hunkered down, playing an all-defense game while you build up resources and then crush the opposition. By that time, that competition will have eaten your lunch and driven you out of business.
  - seanalltogether 16y ago
    Do you have a link to that Starcraft article?
    - roel_v 16y ago
      Took a bit of digging, finally found it in my history: http://news.ycombinator.com/item?id=1402929 http://news.ycombinator.com/item?id=1402929 .
  - Retric 16y ago
    A) Cash on hand has value. B) Banks do charge them interest on that money. So their opportunity cost = (Money * (Potential return - bank interest rate), but risk also has a cost. C) As a public company Edit:(Ahold) could sell stock and gain capital without making their numbers look bad. IMO, if there was a 5% risk of going bankrupt it's a now brainer. If it’s less than 5% they can mitigate it by keeping more cash on hand.
    - sielskr 16y ago
      "As a public company they could sell stock" (Like it says in the OP) Zappos is not a public company, and if the Zappos board had been confident that Zappos could become a public company, they would not have objected to the direction desired by the CEO.
      - Retric 16y ago
        Sorry, the “they” I was talking about was Ahold. I think Zappos probably chose the correct path. As a rapidly growing company they had fewer options.
    - roel_v 16y ago
      Of course cash on hand has value. Question is how much of it is needed to optimize profit. And of course credit lines cost money. That's where the 'risk management' part comes into play. My point is that there are hundreds of people running models and doing calculations on what the optimal way to finance operations in a company of that size is. Contrary to popular opinion these people aren't stupid. It's unreasonable to, a priori, rule out financing inventories with credit, just because there is risk involved. It's about balancing pros and cons, and whoever balances it the best, wins (i.e., makes most profit, or can lower prices to gain customers and grab more market share, or buy competitors, or...) (about Ahold, without knowing the details, the liquidity problem was at the time when details of shady accounting in a US subsidiary came to light. You can't issue more stock in a few days to cover immediate liquidity problems. plus investors aren't going to be too happy when you're diluting their stock just to cover an operating loss. It's a different thing when you're doing it to raise money to expand the business.)
- patrickgzill 16y ago
  Margins on supermarkets are much lower than you think - when A&P was doing 1.06% of sales as profit they were considered superstars for making that much. Imagine a decent sized store that does $200K over a 3 day weekend with people buying steaks, etc. Net profit for all that work, logistics, HR, etc. is about $2,000 .

brc 16y ago

And yet very, very common in the real world. For more fun and games take a look at an airline business funding one day. One hiccup with a line of credit, particularly fuel credit, can bring an entire airline down in a matter of days. The risks of funding retail lines of credit are not for the fainthearted. Get some bad purchasing going, end up with a load of junk in the warehouse that customers don't want and the business can't pay for ; the whole thing unravels very fast.

protomyth 16y ago

A lot of consulting companies got hit pretty hard when their revolving credit accounts got crunched. It is a fact of life when you are talking 30, 60, and 90 day net.

bl4k 16y ago

it is called trade finance. the world runs on it. when extremely large purchases are made between two large companies, the terms of payment can get very complicated, which is why you need banks in the middle. have you ever thought about how you would go about purchasing $1B worth of shoes? Hint: you don't put it on the company amex.