Can a Growing, Profitable Company Go Bankrupt?

Empty pocketsThe goal of every business leader is to grow the business or organization. Right? Sales solve all problems. Right? If I could just increase sales by 10% or just find that next big contract all my problems would be solved. Right? Well, maybe.

What many business leaders fail to consider when celebrating that next big contract is the cost to realize that big payoff. Often, between that celebration and the sweet cash of a paid invoice there may be many months of no income and a pile of bills. How are all those bills going to get paid until the first check arrives? Accountants call this the cash cycle and are essentially the length of time between order and payment. What it means, though, is that you have to finance your company‘s growth somehow until the additional cash flow from the new business sufficiently covers the additional expenses. Without sufficient cash or credit, the success of that new big contract may just put you out of business.

Consider this scenario:

Company owner wants to grow his company and takes on a new piece of business confident in the new revenue stream his company will soon see. At that moment, the cash clock starts ticking. First, there may be development costs, permit fees and salaries. Then materials are purchased and more salaries as work proceeds to fill the order. There may be packaging costs, shipping, freight, delivery fees and expediter expenses. Ultimately the order reaches the customer and the invoice is sent. Customer payment terms average 30 days but some contracts may require much longer terms. In most instances, there is usually substantial time between order and cashing your customer’s check.

How does a company finance all those expenses before that first payment arrives? Before you launch a new sales initiative to grow your company, know how you are going to finance that growth. Calculate your cash to cash time before launch and make sure you have appropriate financing in place to cover all those growth expenses. It’s essential to prepare a detailed cash flow forecast for at least 13 – 26 weeks projecting payments and line of credit draw downs on a weekly basis. Look to your supplier for help as well. Since they will gain from the new business they may be willing to extend payment terms that can help.

Profitable growth has its costs. Knowing those costs and your capital needs is part of the growth process but is often overlooked. Make sure you can afford to grow before you do.

Just an aside….how can you finance your growth opportunities if the banks won’t lend money? Perhaps that is truly why the Great Recession lives on and on!

DaveO

David Oetken is the Director of the Louisville Small Business Development Center. He can be reached at [email protected]

 

Other articles by Oetken 3 Rules for Smart Business Growth