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Using tools wisely

Should you have a line of credit?


When your customers come into your garden center to purchase plant material, you likely have some customers that are asking you for advice with regard to how to plant and grow their purchases.

You, or your employees, will help the customer to select the many items, or tools that will turn the plant that started in a one gallon container into something that is a beautiful addition to the yard of their home. The necessary tools will start with the right kind of shovel, rake, fertilizer, mulch, hose, nozzle, and pruner.

Perhaps in the conversation, you or the customer, will say that the job is always easier when you have the right tools.

Interesting that as often that advice given is correct for the recipient, the same advice is appropriate for the giver. And so is the case with the comment of a job being easier with the right tools.

In your garden center there are several items that are the right tools. It starts with a business in the right location with the right price. It continues with the right sales person, the right display, the right quantity and the right advertising message.

To make all of this happen, the most important tool is money. Having visited with multiple garden center owners as this article was being written, regarding aspects of their business in which these points apply, the first part is to share is that borrowing money is a natural process of operating a business. This begins with the person deciding to purchase a garden center.

While it may happen otherwise, the logical choice in buying the business is that the purchaser will want to borrow money. While you would hope they would do so with a bank, the challenge you are likely to have in selling the garden center is that with a cash purchase of your business, there may be some sizable tax liabilities that you incur.
Instead, you would want to receive the money over a longer period of time so as to minimize your annual tax bill. The challenge is that you do not want the business you are selling to become the collateral for the loan you would have from the purchaser.

If a purchaser has $500,000 to use, instead of buying a garden center for $500,000 it would make more sense, and likely more profit and cashflow, for that same person to use that $500,000 as a down payment toward a garden center that would cost $2,500,000. After all, the interest this purchaser is paying is categorized as an operating expense. And that larger business would likely allow the purchaser to pay themselves a bigger salary.

Once you have gotten into the business you have purchased, it is not likely that all of the additional capital you will ever need is going to be sitting dormant in some savings account until you are ready to use it. Instead, when you purchased the business, you likely had some additional capital which would pay for improvements and growth over a period of several years.

However, as your business grows, you will find that growth is a rather unique ‘animal’ which eats only one thing; cash.

Generally, a garden center that is experiencing grown cannot produce enough excess cash to fund the continued growth. Even as you utilized dating and preseason booking as a means to allow you to have inventory now and pay for it later, rarely is this enough to provide you with that cash for growth.

This writer remembers visiting with an owner at the IGC show some eight years ago. This person told of how they started their garden center with only a minimal amount of dollars some forty years ago. Judging solely by sales, this person was a great owner. However, judging by financial management, this person did not understand business principles.

In the early years of their garden center, they took advantage of every extended dating and preseason booking program offered to them. However, as the business continued to grow, they found themselves in a cash crunch that almost caused the business to fail.
As the business was placed on ‘COD’ (cash on delivery) from most of their vendors, this owner incorrectly determined that it was the extended dating and preseason booking programs that caused the financial crunch.

Working all the harder, and more, in their garden center, this owner pulled the business from the edge of bankruptcy and promised themselves they would never utilize any dating or preseason booking again.

As we visited at the first IGC show, the owner told me they were selling their business and at very favorable terms for the garden center and the land. Several questions were asked of the owner to gain an idea of what the total of sales, and pattern of growth, had been over all these years. With a few minutes, pencil and notepad, it was easy to determine that this owner had the opportunity to have earned an additional $500,000 over the years in business. This is because the owner insisted on not using anyone’s money but their own.

Money again, is like a tool. Used properly and it can help you make a lot more money. Used incorrectly, and it can hurt you. Much like a shovel is a great tool when you want to dig a hole, but something that can seriously injure someone when you swing it at them.

We should clarify there is a difference in a traditional loan and a line of credit.  Using $100,000 as an example, with the loan, the entire amount of money is put into your checking account and the interest charges begin at that point. The loan will be for a specific number of months and a specified amount of money to be paid to the lender each month.

With the line of credit for the same amount, the money is put into your account only for the amount you specify and on a date you determine. Hence the line of credit could easily be multiple occasions where you are putting some of that money into your account.

The amount you pay each money is likely to be a minimum of the interest for the money you have taken from the lender. As this amount fluctuates up and down because you have taken money from the lender and paid money back to the lender, this line of credit likely does not have a specific date on which all of the money is to be paid to the lender.

There are two prominent scenarios in which people establish a line of credit. The first is when there is a problem in the business and they need cash to clear up these outstanding debts. The second is when the owner sees an opportunity to grow the business.

With either, the most important part of the decision process in borrowing money is that of having a written plan for repaying the debt. This is more than just saying, ‘I plan to pay it all back in five years’. It is a calculation of the amount of interest, and perhaps principle, to be paid each month.

The cashflow of the business is also calculated to determine that the business is producing enough cash to maintain, and perhaps retire this debt. Borrowing this money without a plan is a likely recipe for creating a bigger problem that will arise in a few years.

As this is money being put into the business that is to be paid back to the lender, as compared to the owner putting their own money into the business in the form of ‘contributed capital’, this will affect several of the important financial ratios of the business.

Debt to equity, current ratio and acid ratio are three of the most prominent items that will be watched by your lender during the period you are borrowing money.

The current ratio will total all of the current assets, (cash, accounts receivable, inventory, and money in savings) and compare it to the current liabilities (all bills to be paid within the next 12 months). You divide the current assets by the current liabilities. This comparison is examining your expected ability to pay your bills over the next year. The documents from the lender will specify what a minimum number will be for this calculation.

The acid ratio is the same with one small exception; the inventory is not considered with the current assets. With this ratio, the lender will look at how much of the money you are borrowing is going to inventory and how much is going to pay outstanding bills or to pay for things like fixtures, building and operating expenses.

The debt to equity ratio is where the lender is wanting to know how much money you have in the business as compared to how much money the business owes to any and all vendors and lenders. This calculation is making sure that you have plenty of ‘investment’ in the business.

Before you sign any loan documents, you will want to examine these components of the document, and visit with your accountant to make sure you can comply with these components (called covenants).

Whether you are borrowing the money to solve a problem, grow your business with a long term plan or just needing the money, as many garden centers do, on a seasonal basis, this money can be a tool. But only if used properly.

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This article is copyrighted by Tom Shay and Profits Plus Solutions, who can be reached at: PO Box 1577, St. Petersburg, Fl. 33731. Phone 727-464-2182. It may be printed for an individual to read, but not duplicated or distributed without expressed written consent of the copyright owner.
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