Have you ever grown your sales only to find you couldn't pay all your bills on time? You were excited about selling more of your products or services. You knew you were creating higher profits as a result. Then a very unpleasant reality hit home.
You had vendor invoices in front of you to pay and you didn't have enough cash to pay them. Sales were up, profits were up, but you had a nasty cash flow crisis on your hands.
The conventional wisdom says that cash flow problems only happen to businesses that have revenue or expense problems. Not true. Growing your business puts an enormous strain on your cash flow, especially in the short term.
Let's look at an example I use in my seminars and speaking engagements that will show you how this nasty surprise can happen to almost any business.
A small company does about $125,000 in sales each quarter. That sales level produces operating income of about $13,250.
But during the past quarter they succeeded in growing sales to $291,667. The increase in sales, offset by related increases in cost of sales and operating expenses, increased operating income to $51,583.
So sales were up $166,667 and operating income was up $38,333.
Now for the big question: How much did the cash balance increase for that same period?
The cash balance actually went DOWN by $128,334. That's right. The cash balance went down.
What Happened to the Cash?
The increase in sales came from a large new customer who required payment terms of 60 -- 90 days. At the end of the quarter, the company had invoices from vendors for the products they sold to this new customer and all the invoices related to installing the products at the customer's facilities.
What they did not have was the cash from the sale to this new customer. In fact, it would be another 15 to 45 days before they would receive that cash. They didn't have the cash -- instead they had a really big cash flow problem.
The vendors were upset and threatening to stop shipping products on existing orders. The owner of the business had to take off his Chief Executive hat and put on his "Chief Firefighter" hat. He had to shift his focus from getting new customers to appeasing vendors and begging for more time to pay their invoices.
He had succeeded in growing sales just like he wanted. But now, instead of happy customers, happy employees, and happy vendors, everyone was feeling the uncomfortable stress and strain that comes from not being able to pay your bills on time.
Your vendors don't like it. They end up concluding that you are weak and not in control of your business.
Your employees don't like it either. They end up lying and stalling in order to keep the vendors at bay and fighting to make sure that those same vendors continue to ship the products you need to meet your ongoing sales requirements.
Do You Know the Cash Flow Implications of Growing Your Business?
The key to avoiding a nasty surprise like this is to fully understand the impact growing your sales (and growing your business) will have on your cash flow.
Here's the specific question you have to answer -- If you increased your sales by 25% to 50% over the next six months, what would happen to your cash balance?
Answer that question and you have the information to plan intelligently for growth. The key is to understand that you have to look further than your income statement to get that answer.
If you are ready to answer this critical cash flow question, check out my December column that provides you a template and step-by-step instructions for formatting easy-to-understand cash flow projections.
Unlocking the Cash Flow Mystery
In my next article, I will reveal a little known secret about your income statement. This one secret will unlock the mystery that keeps nine out of 10 business owners in the dark about their cash flow.
You'll be surprised how this has been kept a secret in business for so long.
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