The conversation I had the other day started like many others I have with entrepreneurs.
“How can I help you?” I asked.
“I need money to grow my business,” he said.
“So how far along is your business right now?” I replied.
Now, here is where things got a little strange.
In most cases, the entrepreneur says that they are just starting out. Or that they have been around for a year or two and have some customers and a nice revenue base.
But this entrepreneur responded, “Well, we’re 7 years old and projected to do $120 million in revenue this year.”
??? No, this was not the response I was expecting.
So, why does a company that’s doing over $100 million in revenue need capital? To buy a competitor? To build market share since it’s selling products at a loss?
While these are two valid reasons why more established companies constantly need capital, this company was actually very profitable and not looking for acquisitions.
So, why then did this company require capital?
Because it was growing too quickly and hadn’t financially planned for that. You see, the company was manufacturing and selling products at a nice profit, but it needed to pay its manufacturing costs 90 to 120 days prior to when it received payment from its customers.
The result is a cash crunch.
The company has lots of outstanding orders. But it can’t fulfill them since it can’t lay out the cash to manufacture the goods. This is extremely frustrating for the entrepreneur, and potentially lethal (if customers decide to switch to a competitor).
Now, there are two key ways around this problem.
One, as discussed in Growthink’s Definitive Guide to Creative & Alternative Financing Sources, is customer financing, whereby the customer pays for the product upfront or more quickly in return for some benefit (equity or price discounts).
The other is getting outside capital to solve the cash crunch.
The underlying issue here that you must understand is that “cash flow” is very different than “profitability.”
Profitability compares your revenues to your costs.
On the other hand, cash flow determines when, where and at what times cash is coming into and cash is leaving your company. And without proper cash flow projections, a fast growing company can find itself in big trouble.
That’s why it’s critical that all companies, as part of their business planning process, prepare a Cash Flow Statement or forecast. And in fact, companies should prepare cash flow forecasts every month if not every quarter.
This is particularly important for companies who expect significant growth or those with seasonal sales fluctuations.
Your cash flow statement is roughly calculated as follows: Cash Flow From Operations minus Cash Invested in Equipment plus Cash Received from Outside Financing.
It gets a little more complicated than this, since Cash Flow From Operations includes things such as whether your accounts receivable (how much money you are owed from customers) is going up or down, etc.
So, the key takeaway is this – do NOT risk bankrupting or slowing the growth of your business because you don’t forecast your cash flow statement every quarter or month.
If you need help, the financial model portion of Growthink’s Ultimate Business Plan Template has a full, plug & play, financial model which includes your Income Statement, Balance Sheet and Cash Flow Statement, so you can accurately project what your monthly cash flow will be.
Importantly, this will ensure that you can get financing, as needed, well BEFORE the months when you need it (and not risk your company’s future).
Here’s the link to Growthink’s Ultimate Business Plan Template – https://businessplantemplate.growthink.com/.