A hot product, of course, is everybody's dream. But when your company grows so quickly that it can't pay its bills, the dream can turn into a nightmare. How do you keep suppliers happy so you can expand production? And what about all the new hires on the payroll? To make matters worse, as Craig S. Hill, president of Cortex Corp., discovered, neither venture capitalists nor bankers are eager to finance the early stages of fast growth. Hill, however, did find an internal strategy that kept his company on track as it went from sales of $1 million in fiscal 1984 to $5 million in 1987.
Cortex, a Waltham, Mass., software company, had struggled seven years before it finally developed its winning product in 1984 -- a computer-aided software engineering product that sold for $100,000 to $255,000. The nature of its customer base compounded its cash planning problems -- most were large corporations, which often took months to decide on a purchase and even longer to pay. Hill looked for venture capital to help carry the company, but the kind of software he sells wasn't yet established or proven enough to attract either venture capitalists or bankers. In the meantime, the company was putting in bigger orders to its vendors, and adding employees to meet production demands.
As the tight cash routine began to play itself out, Hill and his chief financial officer, Michael Gonnerman, settled on a guiding principle. "We decided we could only play this game with a high degree of integrity," says 46-year-old Hill. "We had to stick to our word." They reasoned that the company needed the support of vendors like the telephone company and landlord in order to keep its doors open. It also needed to keep employees upbeat and focused on company needs so that the sales curve would continue upward. And when the day finally came that cash flow was no longer a problem, says Hill, "We wanted to be able to look our vendors and employees in the eyes and know that everyone wastreated fairly."
Using that as their guiding principle, Hill and Gonnerman gradually settled on a strategy that combined straight talk to creditors and employees with tough management of cash and customers. "Having grown up in sales," says Hill, "I knew that whatever you say, it has to be true. When I got into trouble, I tried to apply that lesson." And the lesson worked. Over the course of its three years of tight cash, Cortex developed this four-part strategy:
* Use the personal touch to keep creditors at bay.
Because the bills were coming in far faster than the checks, there was no way Cortex could hope to pay all creditors on time. As CFO, Gonnerman was in charge of managing the accounts payable. When he promised payment by a certain date, he went all out to meet the commitment. But when that was impossible, he confronted the situation head-on. By being direct and honest, he found he could get much more from creditors than he ever expected.
When the telephone company was on the verge of disconnecting Cortex's service in 1984, for example, Gonnerman hopped into his car to meet with the local manager. He explained that a key customer was late paying its bill to Cortex and won a precious extra 10 days to come up with the cash. The same thing happened with the company's travel agent and, once again, a personal meeting helped the company gain extra time.
Judy Goran, owner of Format, a Dedham, Mass., distributor of business forms and computer supplies, says Gonnerman often delayed paying for supplies or paid piecemeal, but he always cushioned the blow. "Mike and I established a rapport," she says. "If he couldn't give me the money, he would tell me. There was none of this 'the check's in the mail' routine."
In negotiating with creditors, Gonnerman discovered another technique that sometimes worked: He would send checks postdated two or three months, each one containing a portion of the payment due. "Just so they knew they wouldn't have to chase after the money any longer," he explains.
* Lean on key employees for support while simultaneously keeping morale high.
Paydays at Cortex regularly turned into an "event," recalls Hill, as the company struggled to accumulate cash to meet its growing payroll, which numbered about 85 employees by the end of fiscal 1987. And the company often came up short. The question then was, who should take a cut? Should they all lose an equal percentage of their paychecks?
What would be most fair, Hill decided, was for employees to sacrifice "in direct proportion to the stock they owned." The employees who didn't own stock -- a majority -- got their regular paychecks. The dozen or so stockholders were occasionally asked to delay cashing their checks for anywhere from a few days to a month, depending on their stake in the company. Hill, as the largest shareholder, sometimes went three months without pay.
The five or six top managers all received the same salaries -- which in some cases ran 25% less than market rates -- and each knew what the others were making. "it was equally unfair to all of them," says Hill of the low-but-equal pay scale, but with the pressures on them all to perform, he didn't want one manager feeling superior to another.
The other part of the equation -- keeping morale high -- depended on keeping employees excited about the product. It also meant not dwelling on the constant cash problems.
"We had a regular quarterly meeting with employees as if they were our board," says Hill. At these meetings, new orders and product advances were key items of discussion, while the cash problems were minimized. "We let them know the cash-flow situation was something management was worrying about," says Gonnerman. "If you let salesmen or development people worry about cash flow, they'll get too distracted."
* Be opportunistic, and disciplined, in dealing with customers.
The other side of Cortex's cash problem, of course, was customers. Hill credits fellow software executives in a national networking organization, Technology Executive Roundtable, with encouraging him to become more aggressive about upfront payments. The group, sponsored by Digital Equipment Corp., "provided me with the knowledge and the confidence," he says, to raise the ante. Earlier Cortex had occasionally asked for 15% when customers placed orders. Hill found he could ask for, and receive, up to 50%.
Hill was also faced with deciding how much leeway to give potential customers. In 1986, for instance, a major prospect asked for a six-month trial of Cortex's software before placing volume orders. Given its cash crunch. Hill decided Cortex couldn't afford that, and he backed off. Not long after, he says, "The company paid us up front for the product and turned out to be one of our most loyal customers." Essentially, Hill says, he had stood his ground and the prospect made its decision based on the quality of the product.
* Follow Sherlock Holmes tactics to collect and monitor accounts receivable.
One of the first lessons Hill learned was not to rely on the sales force's estimates of when payments would be received. They dealt with the buyers, after all, not the payers. It was left to Hill and Gonnerman to track the actual bill payers down.
"As aggressive as we were in dealing with creditors, we had to be equally aggressive in collecting," says Hill. Gonnerman would track down the individual in each corporation responsible for payments. "Often there'd be a commitment made [to purchase] and the person cutting the check didn't know about it," says Hill.
"The big problem," adds Gonnerman, "was with new customers, not knowing their payment procedures." Once again, Gonnerman relied on the personal approach, trying to secure specific time-tables for payment.
Gonnerman also became a supersleuth in monitoring Cortex's cash flow, sometimes updating his computer spreadsheet three or four times a day -- once a day at the minimum. He plugged Cortex into a computerized linkup that enabled him to track the company's checking accounts and determine which checks had cleared, and which hadn't, on a daily basis.
"I was always in a book overdraft position with my banks," he says. When checks to suppliers occasionally bounched, he was on the phone immediately, advising them to redeposit for collection.
Last year, the cash crunch finally ended for Cortex, as it succeeded in raising $6.5 million of venture capital along with $3.8 million in development contracts from two corporate customers. Hill believes that the company's straight-dealing approach to its cash flow problems -- maintaining the trust of customers, employees, and vendors -- kept it alive until financing was possible.