Stephen H Baum Leadership

ON THE ROAD TO SUCCESS

This is the tale of an entrepreneur who had an idea. He assembled a “crack” senior team, secured blue chip clients, trained recruits and built a company of 30+ professionals which necessitated moving to offices with greater space. He had even negotiated a line of credit with the bank. And invested his own capital in the company. Clients were satisfied. People were productive. Notwithstanding advice to the contrary, the entrepreneur did not know his daily cash flows or balances. As business schools teach: most businesses fail because they are undercapitalized. As venture capital companies teach, an entrepreneur must know cash flows and balances all the time and must be in perennial fund-raising mode. This entrepreneur kept responding to demand, even considering opening an office in another city (but delaying it for reasons having to do with local people).

THE GLITCH

This tale does not yet have an ending. It is a continuing saga from month to month. However, one day the entrepreneur found out that his largest client would not pay its bill for a period well beyond what he expected. The funds were tied up with other suppliers’ funds. A second client made an error in sending (authorized) payment which never arrived. And then one Monday the  entrepreneur found he could not make the imminent Friday payroll. He asked the bank to increase the line of credit. They said they would be it might take 30 days. He was personally pretty much tapped out. He borrowed from good friends. They made deposits which fortunately cleared quickly. This bought about two weeks.

What To Do Next

Furlough staff? Ask the senior team to reduce compensation for 30 days? Ask for emergency funding from one client in return for something of value? Delay start of some projects? Factor the receivables? These are just a starting list of thoughts as there are constraints endemic to the business. But drastic thinking is required until there is a cushion. 

The Path Not Taken

What should be standard procedure? Every business needs a cash flow projection, cash in and cash out for the next 12 months with monthly if not weekly balances. “Hot spots” of low or negative cash should be marked. The cash flow projection should be re-done for several different sets of assumptions that drive the results: revenues, hiring, capital spending, taxes. The growth plan and timing of expenditures should be tailored to what the cash will support.

Presuming the owner has some relationship with a lender (if not, they should nurture one) and some standing balance on account (bankers warm to “compensating balances”), presuming the owner has intentionally borrowed small sums and paid them back on time, a conversation with the banker should examine the projections and anticipate needs for borrowing several quarters in advance.

This article is the basis for a conversation this morning with Jim Blasingame, the leading expert on small business, author of the powerful book Age of the Customer and my friend. I urge you to visit his website:

Small Business Advocate 

 That’s just my view. What’s yours? If you like the article tell your friends. If not, tell me.