Growth = less cash
I have spent the last year talking to fabrication shops, welders and machine shops. My question? What would you do if I offered you a purchase order for $5 million today?
Without exception, they replied that they would have to turn down the order simply because they did not have the cash to buy the raw material.
In the interior of British Columbia, the long recession has resulted in embattled businesses that cannot find financing for growth, even when offered.
And buying raw material is not the only cash drain on a business looking for opportunities to grow. Large orders from reputable buyers means that the invoices to the customer must also be financed, because they do not pay deposits nor pay C.O.D.
The Northern Development Initiative Trust is warning businesses who want to take advantage of the northern mega projects, they must solve the capacity problem and being able to finance 180 days of receivables, joint ventures are the order of the day.
“Revenue is vanity, cash flow is sanity, but cash is king”. What this means is that whilst it may look better to have large inflows of revenue from sales, the most important focus for a business is cash flow
History is littered with business that sold themselves into penury. It is a peculiar truth that rapid growth needs huge amounts of cash to finance the growth and that cash comes behind and more slowly than expenditures. A cash flow analysis reveals how this happens. The cash is staggered by days to pay by the customer. Suppliers want to be paid in 30 days. Do the math and see how a sudden expansion can hurt you.
What to do? There Is a great article in Entrepreneur (http://www.entrepreneur.com/article/66008) outlining the 4 principles of better cash management:
- Invoice and collect your receivables on time.
- Measure and manage your cash (cash flow analysis).
- Manage your payables. Incurring financial penalties in a cash crunch is unnecessary.
- Manage your suppliers. When you stretch your suppliers, don’t let it cripple your business.
This column focuses on business problems and how to solve them. Andrew Gregson, BA, MA , M.Sc.Econ is an economist, author and a Senior Partner in iNTENT Financial Inc, a Kelowna based finance and consulting company. The 4 partners specialise in finance, pre-determined profitability, sales and marketing. If you need further information, please contact us through the website at www.intentfinancial.com.
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