That’s not just the cash register ringing when your sales suddenly take off. It’s a warning bell.
Going broke making money
Rapid growth is good, right? Right? It’s the ultimate entrepreneurial dream. You start a business, struggle for a bit to get the business model right, then whammo – it takes off.
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Sales are growing almost daily it seems and demand is strong. Let’s allow some more credit (sales) to really ride this demand. Now we need more inventory – come on suppliers, we need it yesterday. Pay a bit more to get it quickly, it doesn’t matter. We need some more room, too. Get hold of something. We need some more people, just get them in here – now.
If you’re getting excited by this, terrific – me too. After all, this is what we want – the business is finally cooking. We’re going places. All is good, as long as you are prepared for the impending cash crunch heading your way.
Your main source of cash is generated from sales. If you sell on credit, you have to wait to get the cash for each credit sale into your bank account. If you are having a sales bonanza, your existing systems may start to overload. Forgetting to send out invoices, sending them out late or even incorrect (new staff?), not collecting on overdue accounts and poor order fulfilment practices will delay your cash collections drastically.
On the other hand, you are still using cash to pay for inventory, your wage bill and your usual expenses of doing business, plus any new ones resulting from the increased demand – additional premises, new employees (including managers to oversee growing teams), additional technology costs and so on.
Many of these new costs will be “stepped”; that is, they won’t vary proportionately with the increase in sales but are a “step up” to a whole new cost level, possibly before you are ready to go there. An example would be adding a new employee. They need a work area and probably some technology – phone, computer, etc. But what if your IT system is already maxed, or your communication links have no further capacity, or the person will be in a new location … you get the idea. Additional premises or the introduction of management positions are some other examples of stepped costs.
These stepped costs can also cost more than they should, simply through insufficient time and attention being given to getting the best deal or selecting the best person. “We’re flat out here! Just do it! We can sort it out later …”
You can be as profitable as you can imagine and still run out of cash through not paying attention to the sales/collection cycle and not plotting your cash usage needs going forward. Maybe you need an additional loan facility or equity injection to “step up” your operations safely. Accountants in public practice have seen plenty of profitable businesses go broke through poor cash management. You can avoid becoming one.
Mark Robilliard and business partners Peter Frampton and Carmen Mettler started looking for a new way for anyone to “get” accounting and use it in their job and life to create value. Accounting Comes Alive provides workshops using their unique Colour Accounting™ learning system.
To read more Mark Robilliard blogs, click here.