One of my favorite business puzzles is how to manage a fast growing company without running out of cash. For fast growing companies, there is a need to invest heavily in people, infrastructure, inventory and equipment. Usually, this requires significant cash or debt outlays well in advance to ensure scalability.
Luckily, there are things owners and management can do to help mitigate the strain on cash flow. Let’s look at a few examples:
When most companies begin to experience high growth, they should notice that amounts due from customers will continue to grow month after month. A lot of the time companies are just coming out of that small startup phase and don’t have someone dedicated to credit and collections. Late payments and defaults may be slipping through the cracks. If you can’t afford a full time credit and collections staff, make sure you have someone closely following your A/R aging and calling customers to check on payment status. Also, do yourself a favor and make credit checks on all new customers a standard part of your sales process. Trust me. It’s cheaper to lose a potential customer than to write off receivables. Also, you may be able to convince customers with poor credit to pay in advance. Finally, there are a number of banks and firms out there that will finance a portion of your A/R balance. This is called factoring. It’s not cheap, but neither is running out of cash the week of payroll.
If you are selling a tangible product and your customers have any sort of expectation of a reasonably quick delivery, then you are going to be stocking up on inventory. This little cost can cause all kinds of cash flow headaches. Here you should keep a very close eye on inventory turns (how many days it takes to sell the inventory on your floor – typically calculated by dividing your cost of sales by the inventory) by product or product line. Compare this to lead times for delivery from your suppliers and expected future sales of the relevant product. If you can get product in 10 days from your supplier, you should probably buy less if the turns are coming in higher than that. More inventory requires more space which requires you to rent or buy warehouse space. There are all kinds of white papers floating around the internet to help you understand efficient management of inventory and negotiations you can make with suppliers and distribution channels to help reduce your cash flow burden. As with Accounts Receivables, you can finance inventory as well.
This should be easy. Make sure to pay on term and not before. Plenty of owners become complacent and just sign checks every two weeks for all the invoices that are due. Also, try and negotiate longer payment terms with suppliers. This won’t work across the board, but every little bit helps.
I don’t think the direct and indirect costs of hiring and training are fully appreciated until you’ve seen a company with significant growth. This is a tough one to aggressively manage cash flow on, but you can try to save a bit on the front end by offering rewards to current employees for finding new talent and saving on recruiting fees. Also, hiring a bunch of new people will consume a considerable amount of time and productivity of current management and employees. This should be taken into account when budgeting for contributions from old and new employees alike.
Lines of Credit
I know that getting credit is tough and banks have designed even more creative and colorful hoops to jump through, but if you can craft a compelling story you can often find lenders willing to listen and help bridge the gap between cash out and cash in.
Finally, one of my big favorites…. Budgeting. While this seems to be a way for the accountants to make your life miserable, it can act as a powerful tool to identify issues that may be lost in the shuffle of a rapidly changing P&L and Balance Sheet.
There are a lot of business owners out there that would love to have these problems. If you’re one of them, enjoy it.
Mike Voie, CPA