The Liquidity Trap*
Simply put, the more product sales company makes, the more cash is tied up in funding the deals. Vendors typically require 30 day terms (though savvy companies can negotiate 45 days) yet customers pay in 45-90 days! Service companies are a bit more fortunate in that they generally have lower working capital needs.
Even the best companies fail to plan for "actual investment required" during high growth periods. Furthermore, many do not account for the "lost opportunity" or opportunity coast as teas retrain to learn a new product, for instance and are taken out of the field. There are often on-time expenses for which a return cannot be reasonably expected for many months or even years. Some guidelines for the investment are provided in the strategic section. It is widely known (and as we have experienced with clients) that companies are most at risk during high growth periods. It is easy to see that investments of just $100,000 to $200,000 for a $10,000,000 company, for example, can significantly impact cash flow. Let us use the example of a new office.
- Can the company assume a $1000,000 office set-up and the salaries in that office for a period of a year or more before the office can sustain itself? Now, add at least 50% to your budget for office set-up as it will undoubtedly cost you more if you haven't done this in the past.
- What other investments are in progress simultaneously that may drain people, focus and financial resources?
- Are you setting the office up in November or December before traditional slow sales periods?
- What if a large client (one client or a few producing significant revenue) during your expansion has a cash flow problem and you need to wait 3-4 months for payment? What's the plan B?
- Are you comfortable with higher risk levels? Secure adequate credit lines and/or alternate emergency financing *before* pursuing growth initiatives.
There are a variety of industry specific financing and flooring plans available that can reduce some of the exposure while funding 80% to 90% of your sales. Financing is often offered by or through vendors and distributors. There are also independent financial lenders. While not always less costly than traditional bank financing, they are not usually more expensive and generally offer more flexible terms. Financing programs within the industry are offered by companies such as IGF (IBM Global Finance), GE Capital, and GTF (Global Technology Finance) to name a few.
*excerpt from Mastering a Culture of Accountability by Chris Winter & Larry Kesslin. Published 2008 by Advantage. ISBN 978-1-59932-067-0
