Until her fashion emergency of 2014, Sarah Carson thought business couldn't be better. In three short years, the self-taught dress designer and founder of Leota had seen sales skyrocket. Customers loved her brightly patterned dresses, and ahead of its spring release, the New York City company was anticipating its best season yet.
So Carson thought it made sense to double her orders for spring dresses from the previous year: "I'd never seen so many polka dots in my life," she jokes.
It was the wrong decision. Like many first-time founders still getting a handle on their company's business cycles, Carson had failed to plan for the delay from when she made her products to when she could deliver them--or, more crucially, get paid for them. She didn't realize her mistake until after the fabric had been ordered and the dresses made, creating an inventory pileup. The department stores that are Leota's biggest customers didn't want their shipments for two to three months--long after several bills were due. Which is how, during an explosive sales season that should have been her biggest triumph, Carson suddenly found herself on the hook for $300,000 she didn't have.
"I was scared and embarrassed--I was on the brink of growing the business to failure," Carson recalls. "I had perfectly made dresses hanging on the racks there, ready to go--and I didn't have the cash to pay the vendors who had made them."
Managing money is rarely anyone's favorite task, but ignoring it poses one of the most serious threats to your business. Cash flow is the single biggest challenge identified by small-business owners in a March report from the Federal Reserve. Nearly a quarter of the companies surveyed said that managing cash was their top concern, more than factors like the costs of running a business, hiring talented people, and following government regulation.
It's a particularly acute problem for the founders of businesses that deal in physical products, like Leota and Washington D.C.-based coffee shop chain Peregrine Espresso, though service-based companies, like Mattermark, a San Francisco-based software startup, certainly aren't immune to cash-flow issues. Retailers handling inventory and manufacturers can face some of the greatest difficulties, according to Sabrina Parsons, CEO of Palo Alto Software, which makes financial-planning software for small businesses.
The consequences of neglecting your cash flow, or falling behind, can be brutal. As Levi King, co-founder and CEO of business financing marketplace Nav, puts it, "Miss payroll and your employees quit. Miss your lease payment and you get evicted. Miss payment to your supplier and you run out of inventory."
Any of these fates could have befallen Leota in 2014. But today, Leota, No. 386 on 2015's Inc. 500 list of the fastest-growing companies in America, is thriving, with revenue projected to be $6 million this year. It got here thanks to the quick thinking of its founder, who knows how to pick herself back up off the ground.
Carson, now 37, had no fashion-industry experience or contacts when she decided to try selling the type of dress she couldn't easily find for herself. "I like to have one dress that you can wear everywhere, and I wasn't seeing that out in the marketplace," she says.
But when her 2014 cash crisis hit, Carson, who stands just 5 foot 3 inches, was literally ready for battle, thanks to a lesson she learned from her time competing in kung fu. Although she was a U.S. champion in full-contact kung fu, she came in a disappointing fourth at the World Kuo Shu Championship--kung fu's equivalent of the Olympics--in Taiwan in 1996. "I had never lost a professional fight, so that was crushing," she says. But the loss reminded her of her kung fu grandmaster's mantra: "You win when you lose, if you learn." So, when she got home, she immediately started training for her black belt in bok fu do, another, broader practice of the martial art. "That was a lesson that I often draw on in business," she says.
She also trained herself in financial accounting at night and on weekends before landing an investment banking job on Wall Street. Carson attacked fashion with the same intensity, scouring competitors' websites for information about potential sales agents--and even performing some in-person reconnaissance in New York City's garment district.
"I would follow delivery guys in the garment neighborhood," she says. "If they were wheeling some fabric rolls around, I'm going to go into that building, because they're probably going to a factory that I could work with."
She applied the same tenacity to solving her budget problem. Once she realized that Leota was facing a "huge strain on cash," she started calling suppliers and manufacturing partners, begging to negotiate her payment terms. Eventually, she was able to eke out a few additional weeks to bounce back.
"I had poured my heart and soul into this company and persuaded a dozen other employees to do the same," she says. "So I had to reel in my fear and fix this."
Her pleas might have failed if Carson hadn't already built strong relationships with her vendors. And she's since made some big changes to her manufacturing process to avoid the problem in the future. For example, while it's faster and easier to order an entire season's worth of dresses all at once, Carson now makes multiple orders for smaller batches spread out over time. "The efficiency of doing it all at once doesn't really matter when we get the bill for the whole entire season," she says.
The other thing Carson did while scrambling for cash flow in 2014 was contact her lender, and prepare a detailed presentation explaining her budget crunch. She relies on factoring, a common type of financing for manufacturing-based businesses, in which a company gets upfront cash by selling the factor its accounts receivable (the amounts due from customers). You pay for that quick financing, though. It can be pricey, and factors are generally less regulated than traditional bank lenders. But for Carson, it paid off, because her lenders had run into this type of situation before--and they considered her business a good bet. "To my surprise and relief, the factors were not the least bit concerned," she says. "In fact, they wanted to invest in my company's growth. They approved a bridge loan on the spot and wrote me the check that day for the full amount."
It's obviously reaped rewards--and helped Carson continue to expand, carefully. Leota launched an online store in 2015, and Carson says she's looking to move into retail. She's hired a CFO to focus on planning the company's financial future, and wants to eventually build Leota into a full "lifestyle brand," with handbags and other accessories in addition to its current range of dresses. "With our growth, I now have a lot of investors wanting to give me capital, but I'm holding off because we don't need it," she says. "There may be a point when our growth will require a bigger financial partner, but for now, reinvesting cash is sailing us through our expansion targets."
As Carson found out, some cash troubles are big, nasty surprises. But sometimes, they're simply a hazard of your industry's business model, as they are at Peregrine Espresso. Co-founder Ryan Jensen says his cash flow challenge came when he was expanding. He needed each new location to plumb different types of customers or else he'd be vulnerable to the same buying patterns at all his stores. Today, his three locations--some filled with cubicle dwellers, some heavy with weekend caffeine junkies--smooth out his revenue stream. "The three different environments tend to make up for each other," he says. "If we had three shops in the office district--you have a federal holiday and no one's working." And no one is buying coffee.
For Mattermark, the cash risk was in staffing up, and paying new salespeople for months before they made deals. "They have a ramp-up time before they start to turn the corner and become at least cash-flow neutral for us," says Michael Holder, Mattermark's vice president of finance.
To find out how Holder, Jensen, and Carson keep their cash flowing, check out the infographic below for our in-depth guide to managing your money.
Where companies get crunched
How businesses with revenue under $10 million pay their bills--for all industries and in the sectors where Leota, Mattermark, and Peregrine Espresso compete, according to data provider Sageworks.
Percentage of revenue spent on:
All other expenses/profit
The average length of time it takes a business in this industry to get paid for products/services
The average length of time a business in this industry has to pay its bills