Finance Growth Stages

If you aren’t careful, ‘you can sell your way to bankruptcy’

On a recent Shark Tank episode, celebrity investors Mark Cuban and Lori Greiner teamed up to invest in BottleKeeper, which sells a stainless steel container created to keep glass beer bottles cold while protecting them from breakage. But during the episode, Cuban questioned why the business needed his cool million, since it was a profitable business that racked up $20 million in sales the past three years. The California entrepreneurs said they wanted to take their product into retail stores – they had been selling solely online — but they didn’t have the capital to produce the required inventory to make that leap. After marketing to stores, they had hundreds of stores wanting to carry the product (and no doubt hundreds or thousands of online orders after the show aired).

The BottleKeeper entrepreneurs face a common growing-company challenge – profits just aren’t enough to grow the business.

Entrepreneurs like to sell, sell, sell, but they often don’t have the resources – personnel, inventory, equipment etc – to keep up with that growth. Just because the top and bottom lines look good on their financial statements doesn’t mean they can finance that growth.

Profit is not cash flow.

Ray Juncosa, a consultant at Florida SBDC at FIU and a finance specialist, agrees. “What happens to a lot of these businesses is that they love to sell but they don’t understand their operational cycle, the cash conversion cycle.”

The risk, he said: “You can sell your way into bankruptcy.”

Indeed, what’s the No. 1 reason small businesses fail? Cash flow, not lack of profits. According to a U.S. Bank study, 82 percent of small business failures are because of poor cash-flow management. And managing cash flow is not just a small business or startup challenge, as Tesla, IBM and GE can attest.  Some pretty famous entrepreneurs have admitted cash flow issues nearly sank their business, including Richard Branson.

What do you do so your business doesn’t become a statistic? On the receivables side, make sure that your terms are not too long and that your receivables are quality accounts to keep delinquencies down.

Be careful on the payables side, too. Buying inventory that doesn’t move becomes stale, then obsolete.  And this time you want terms on your side – as long as possible to pay.

Juncosa hears it all the time: “They say “we recorded a profit last year, we paid taxes, but I don’t have enough money in the bank.’ I tell them you have too much money tied up in inventory or receivables or both.”

He added, “When the speed of moving your inventory and receivables slows down too much, it’s not a good future for your company. That’s the funding source of the business – it keeps the business alive.”

Small businesses may be growing and yet they have pain points on the supply side with 3rd party manufacturing companies that want a lot of money up front. They may be manufacturing outside the U.S., where currency fluctuations may work against them.

Entrepreneurs get excited when they win a contract with a big-box retailer. But before popping the champagne, understand there may be terms attached such as you won’t get paid for 90 days. Meanwhile you have to buy the inventory and pay overhead expenses, Juncosa said.

“Can you sustain that?  If you can’t and you can’t get a capital infusion, Sometimes it is better not to do it, because it can put your business out of business.”

Growing companies need more employees, a bigger marketing budget, more equipment. Sometimes companies can lure investors for a capital infusion, in the way the Shark Tank company did. But without a Mark Cuban in their corner, small businesses can try to take out debt.

For capital expenses, Florida SBDC at FIU consultant Julio Villiers advises companies to try for a line of credit with a bank or a commercial loan. Consultants at the Florida SBDC at FIU routinely work with business owners to help them obtain growth capital.

Another tip: Payroll is one of the largest expenses a company has. Instead of weekly payroll, go bi-weekly, said Villiers, a finance specialist.

And just like when you own a house, “every company needs to be prepared and have reserves for future obligations and expenses,” Villiers said.

Growth also requires a smart growth strategy, a good relationship with your bank, maybe a line of credit, Villiers said.

It’s a process, added Juncosa. “Fundamentally it starts with financial literacy and understanding the operating cycle. When you can analyze and manage that, you are on your way.”

READ MORE: Cash flow – it’s not sexy but it’s the pumping heart of your business. Here are 5 ways to keep it healthy.

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