Question, true or false:

Is it possible to generate a profit and still have inadequate cash to support your business?

If you answered false or I don't know, you're a candidate for Growing Broke. One of the most puzzling things that many new and existing businesses have difficulty comprehending is that, SUCCESS CAN KILL. We all know that 'failure' kills a business but, how can 'success' kill?

Even though a business is profitable or will achieve profitability when it fulfils its sales goals, business can suffer from the ailment called Growing Broke. Growing Broke is a cash flow problem. Remember that old saying "It takes money to make money"? Well, when your Growing Broke, that saying was never truer.

To start to comprehend how you can Grow Broke, think about all the cash you need to invest in equipment, inventory, accounts receivable, hiring and training staff, etc.. In the very beginning of a business, that cash will come from you, your lenders and suppliers who allow you a short period of time to pay them back (accounts payable). Sales are another source of cash and of course the most preferred source.

Many people get confused between a sale and the cash from that sale. If you sell on terms such as NET 30 days, a sale today means that you will not see the cash for 30 to 45 days. Why 45 days if you offered them 30? Well, most people do not pay on time. By the time they do their payables (they will usually not start processing payables until the 30th day) and send you payment, one to two weeks can easily pass.

Funny enough, in a lot of cases your bills like employee wages and benefits, COD suppliers, down payments on additional equipment., personal living expenses, etc., have to be paid NOW or much quicker then 45 days. Can you now feel the possibility of a potential cash flow problem? (Why is it that in business money wants to go out quicker then it comes in?)

The solution is to grow the business, get more sales, right? Yes, for many. For some, it can actually aggravate the cash flow problem. They may have to spend even more before they can grow sales on staff training and wages, additional inventory or equipment, market planning and promotional costs. Remember, these bills may have to be paid prior to getting a sale and prior to actually receiving the cash from a sale. This can turn into a real Growing Broke problem for fast growth businesses if it is not WELL PLANNED!

This problem can be very evident in the oil patch or companies that rely on insurance claims pay outs. Many of these types of companies do not pay contractors for up to 90 to 120 days. We all know that staff, landlords, lenders, materials suppliers, all expect to be paid in a much shorter period. Growing quickly in this type of situation will be deadly without good planning and good relationships developed well in advance, with understanding lenders.

So how can you insure against Growing Broke? CASH FLOW PLANNING is the answer. You have to know exacting how much and when you will be receiving cash and exactly how much and when will you be spending cash. The use of cash must equal or be exceeded by the availability of cash from ALL sources.

If you think the above does not apply to you, I have one more example of how cash flow planning helped a growing business. This business was in a dilemma. They had a lot of cash in the bank and needed some new equipment. Should they pay for the equipment from cash and save interest payments or, put some money down, finance the remainder and have a lot of cash which was providing very little interest? CASH FLOW PLANNING provided the answer. By forecasting cash needs into the future, they realized that in six months time a seasonal downturn in their normal business was going to cause low sales and cash inflow while, cash expenses remained almost the same. Had they gone with their first hunch to pay cash for the equipment and save interest expenses, they would be in need of a lot of cash for the seasonal downturn. They knew their banker was not about to extend the line of credit during seasonally lower sales. With this information, the solution was to put a low down payment, finance the balance of the purchase and conserve the cash.

Contact your accountant or The Business Link for more information on not Growing Broke.