The Good News: Your Business is Growing – And That’s Also the Bad NewsPosted on June 3rd, 2017
Outsourced Accounting Department, Inc.
This article from Entrepreneur Magazine, “Why Your Business Could Be Failing Even If You Hit Your Numbers,” brought to mind an experience I had with a former client / employer. My initial task as a consultant was to prepare a business plan for this company, a contract electronics manufacturer, and assist the company with obtaining financing to support its growth.
In our first planning session, I asked the owner of the company to provide me with his sales projections for the last three quarters of the fiscal year. In a subsequent meeting a few days later, he came back with a spreadsheet indicating his sales would increase 6% in the second quarter, 9% in the third quarter, and12 % in the fourth quarter. And my response was, “OK, now, write in the margin ‘ha-ha’- what I really want to know is what your customers are going to buy from you, and if you don’t know, call them and ask them.” (In this type of business, future production requirements were known far in advance by the company’s customers).
So back to the drawing board he went, and to everyone’s surprise, the sales assumptions he came back with far exceeded his original forecast. That was the good news. But now here was the bad news: This sales growth created another major challenge for the company – how much permanent working capital was needed to support the large amounts of inventory and increases in accounts receivable, and where was it to come from?
Well, we ultimately worked out that part. The company’s growth was so fast that it was not a “bankable” scenario, so initially we arranged an asset-based credit facility against accounts receivable only. As the company grew more and its permanent working capital needs increased, this loan was later replaced by a larger asset-based credit facility from another lender that also included an advance component against certain classes of inventory.
Fortunately, this company became aware of the amount of funding it was going to require to support sales growth, and took the appropriate steps to plan for it well in advance of the need. Had it not done so, the outcome could have been catastrophic. So all was well that ended well, right? Stay tuned.