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Financial Planning, or Business Turnaround – Your Choice

Posted on June 5th, 2016

 

Jack Kern
Owner / President
Outsourced Accounting Department, Inc.

In my last article, “The Effect of Sales Growth on Cash Flow,” our fictitious entrepreneur, Larry, got himself into quite a predicament by growing his business too fast, and not having sufficient profit or external funding to finance that growth.  So now let’s see what his cash flow would look like if he had planned ahead and done things a little differently.

In this scenario, which I now call Larry’s Turnaround Strategies, Inc., I assumed that Larry does a much better job of managing in two areas: 1) payroll, and 2) receivable collections:

Note on the pro forma P&L that his Net Income is now (rounding) $118,000, or 30% of sales, versus only $15,000 previously, and his monthly receivable turnover is reduced from 45 to 30 days, thus producing an additional $37,000 in cash flow as a result of improving receivable collections.

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Now, refer to the Statement of Cash Flows to see the impact these two improvements had.  The company goes from a cash deficit of about $11,500, to a cash surplus of $129,000.

The point is this: sales growth for the sake of sales growth is dangerous. Yes, there are times when a business can take on aggressive sales growth.  But from purely a financial perspective (vs. operational which is a whole different issue), doing so without having either adequate profitability, or outside capitalization in the form of financing from a receivable finance company (or other specialized lender), or investors, or both, is a sure “plan to fail.”  At the very least, you may wind up in a highly stressful turnaround situation where you are unable to obtain materials from critical past-due suppliers, and a bank breathing down your neck everyday either pressuring you to restore profitability, or worse, calling your loan and threatening to liquidate your company.

So the moral of the story is, if you’re going to grow the business, focus first on profitable growth, and then plan on how you’re going to fund that growth ahead of time, not after-the-fact when it’s too late.

In my next article in this series, we’ll take a look at what Larry’s financials need to look like to enable him to maybe someday retire.

Jack Kern
Owner / President
Outsourced Accounting Department, Inc.


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