My team was brought in to help a fast-growth company in the construction industry that was getting ready to crash and burn. They knew they had a major issue when they were getting ready to process payroll every other week and kept realizing they didn’t have sufficient funds in their checking account. That’s when they reached out to us.
Their books were a mess, they were low on cash, and they couldn’t tell how profitable they were. They were growing fast, but spending a lot on labor, commissions, and inventory, and not seeing the cash in their bank account from their customers. They needed to make big changes.
In short, they had a severe mismatch of cash flow timing. Their profitability was good, but cash was going out way more quickly than it was coming in.
Three of the biggest things we did were: making tweaks to when commissions were paid, changing payment terms on inventory, and changing terms with their customers to get an appropriate down payment with contract acceptance. Together, those three things increased their cash flow and put them on the right side of their cash on an ongoing basis.
In fact, they grew so quickly that they were just bought out by private equity looking to roll up in that industry!
Are you a fast-growth company struggling with cash flow (or wanting to avoid a future cash flow problem)? Read on for 10 common pitfalls to avoid so you don’t fall off the cash cliff.
1. Excessive spending. I see it all the time: for some people, growth equals entitlement to spend. But sales growth doesn’t 100% land in your checking account because getting revenue requires offering deliverables that cost you money. If you’re not paying attention to that, it can lead to excessive spending leaving your bank account way emptier than you thought.
2. Books in disarray. Your cost to deliver on your revenue promise should be low enough that you generate gross profit. That number needs to be greater than your overhead expenses like IT infrastructure, subscriptions, your virtual assistant, rent, etc. It’s critical to get clarity on your overhead expenses and have the ability to run reports on your accounting system so you can manage and understand them.
3. Late payments from your customers. Usually, this is a result of not having an internal follow-up process for collection or the inability of customers to pay. If customers can’t pay, it’s really on you for extending them credit. If that’s the case, you need to evaluate your process for extending credit to customers and clients so this doesn’t keep happening.
4. Unattainable sales forecast. The flip side of fast growth: what happens when growth isn’t as fast as what you thought it would be or what your spending was predicated on?
Some people view their business as “if you build it, it will come” — they spend the money to develop the capacity to deliver on big sales before they exist. Maybe your supply chain has a long lead time so you have to put money out before product arrives and maybe you didn’t estimate your quantities correctly. It can lead to a cash deficit if your forecasted sales are far greater than your actual sales.
When you have that gap, you probably spent more cash in advertising, funnels, marketing, and procurement to deliver on that sales forecast. All of a sudden, you’ve let go of a lot more cash than you have coming in and you end up in an upside-down position with your cash.
5. Failing to create a financial plan. A lot of people can forecast sales but may not be able to put a full financial plan together that takes into account seasonality, changes in your supply chain, pricing fluctuations if you have them, varying labor costs, and more. All of those things need to will be taken into account considered and can be examined if you have a full financial plan. If you don’t, you’ll lose the visibility into what can help you see the path forward for your cash flow.
6. No cash in reserves for setbacks, unknowns, and opportunities. COVID shutdowns taught us that we must have cash in reserve to buffer against the unknown. We didn’t see COVID coming, and unfortunately it caused some businesses to crash and burn. With that experience in our back pocket, we can see how important it is to have reserves on hand for those uncertain times. (I recommend having 6 months reserves, by the way.)
7. No safety net in place. To complement your cash reserves for uncertain times, you also need to have a safety net. The safety net is in the form of a line of credit with your bank. My philosophy is that you need to get a line of credit in place when you don’t need it, because when you do need it you may not be able to get it.
People who had those credit lines in place prior to COVID shutdowns had access to funding through the CARES act and additional working capital available to which kept keep their business going and supported the people who relied on them to make a living.
Cash reserves and credit lines work in concert to protect you. Make friends with your bankers so you have that cushion to help you get through and bounce back from uncertain times!
8. Growing too quickly. Did you know that you can grow yourself out of cash? It’s true: cash can go down when sales go up. As you grow, especially at a fast pace, things like expenses, inventory, and accounts receivables from current customers can get away from you.
For example, your accounts receivables could start aging because for whatever reason they’re not paying, but and you’re focused on growing your company and so not following up with them. That’s money hiding in your business that needs to be reigned in! The squeaky wheel gets the grease, so figure out how to ask for it or automate it.
If you’re just looking at your profit and loss statement, profit is not the same as cash in your business and doesn’t paint the full picture. (Click here to learn more about cash flow versus profit.)
9. Charging too little for your product or service. When is the last time you did a price increase? In non-COVID times, that should be a regular analysis. When you raise your prices regularly, you get to continually pay your employees more for kicking ass for you. You don’t lose money when your cost to deliver your product or service goes up.
You also need to look at the competitive environment. What are your competitors charging? What’s the marketplace like? What are other people in your industry charging for an equivalent or similar product or service? Understanding those numbers helps you adjust your own prices.
10. Paying cash for large purchases. I see this so often! Don’t do it. You might think it’s a good idea to pay for a company vehicle or a significant piece of equipment in cash if you think you can afford it, but it’s a mistake.
Why? Because you’re letting go of a ton of cash all at once when there are financing options available to you. You want to be able to match paying for your income producing asset (for example, a company vehicle) with the income it’s producing.
For this example, you’d want to figure out how much income can be produced per month by that particular vehicle and weigh that against the cost of the loan payment on that vehicle including as well as regular maintenance and gas. Obviously, the income should be greater than the cost because you want to produce a positive cash flow month in and month out. Then you’re always adding to your bank account rather than draining it by having that asset in service in your business as you pay for it.
I see business owners miss these warning signs all the time, and I don’t want you to fall off the cash cliff. So if any of these points ring true for your business, it’s time to make some changes.
At TurboExecs, we help small and medium businesses that are struggling with chaos, such as out-of-control growth, sudden terrifying decline in revenues or profits, or people problems that are having a negative impact on the business. Struggling with your cash flow or profitability and want to create manageable, sustainable, profitable growth? Reach out here to start to take back control of your business.