Tag Archive for 'debt'

Business Growth: An Irony in the Marketplace

Here’s a scenario that plays out in the marketplace every day in Small Business, USA:

“My business is really growing these days,” a small business owner confides to his friend, “but we’re still experiencing negative cash during the month.”

And then, with that deer-in-the-headlights look on his face, he completes his concern, “I thought by now, with sales and profits up, cash flow would be the least of my worries. I used to be afraid I couldn’t grow my business; now I’m worried that our growth will collapse it.”

This entrepreneur’s lament is one of the great ironies of the marketplace: A small business in danger of failure as a result of extreme success.

Beware Blasingame’s Razor: It’s redundant to say, “Undercapitalized small business.”

This maxim is especially true for growing small companies, because sales volume growth depletes cash in two dramatic but predictable ways:

1. When the business is growing, organizational upgrades are to be expected in order to handle the new demands ­ new vehicles, staff, technology, etc. Of course, you must fund these things, often while the exciting new sales growth is merely on paper, and not yet in the bank.

2. Selling to customers on an open account - where payment for work or products is collected after delivery - is essentially making loans to customers. And while it’s true that your vendors may let you do the same, typically they allow you less time to pay them than you allow your customers to pay you. This difference between when you pay and when you collect mathematically creates negative cash.

Here’s how to manage these two challenges:

1. Growth plans must be compatible with the ability to fund that growth. Too often we think that the big growth hurdle is to get customers to say yes. But we must consider the impact of sales growth on cash flow before delivering a proposal. And don’t be surprised if the answer to this equation shows that you actually have to turn down some business.

2. Don’t use operating cash to fund acquisition of capital assets that have a life expectancy of more than 2 years. Capital purchases should probably be funded by bank debt, and the interest you pay is the wages of Blasingame’s Razor.

If you don’t like debt, or paying interest, that should motivate you to leave profits in the business as retained earnings, which is ultimately the best way to overcome Blasingame’s Razor.

3. Do a better job of collecting receivables on time. Understanding the relationship between Accounts Receivable Days and Accounts Payable Days is an “ah-ha” moment for any small business owner. Sustained growth cannot happen without continuous and regular monitoring of this ratio.

Write this on a rock…. If your business is growing nicely, congratulations. But beware Blasingame’s Razor. It is possible to succeed yourself right out of business.

SBA Poll: Who will bail out America?

The Question:
With America’s 2013 Independence Day now over, what do you think about the future?

19% - The U.S. is, and will remain, the greatest nation in history.

67% - U.S. greatness is in peril, but there is still time to recover.

14% - The U.S. has had its day and is in an inevitable decline.

My Comments:
As Americans look back on the 237-year history of the United States since declaring independence from Britain in 1776, we can point to many peaks and valleys along the way.

Today there are many national issues being debated. And, emotions are high enough on certain issues that it is not uncommon to hear the existential question asked, “Are America’s best days behind us?”

We wanted to know what our small business audience thought about this, so in our online poll last week we asked: “With America’s 2013 Independence Day now over, what do you think about the future?” Here’s what we learned.

Almost one-in-five of our respondents were optimistic by choosing this option, “The U.S. is, and will remain, the greatest nation in history. A slightly smaller group offered the opposite prediction, “The U.S. has had its day and is in an inevitable decline.” But just over two-thirds of our sample seems to be pragmatic optimists by declaring, “U.S. greatness is in peril, but there is still time to recover.”

Paraphrasing a line in the 1949 movie, “The Third Man,” generations of strife in Italy produced Michelangelo, Leonardo da Vinci, and the Renaissance, while hundreds of years of brotherly love in Switzerland produced the cuckoo clock. America is known for its brotherly love, but ours is more like the kind you find in most families: lots of love mixed with lots of fighting.

But there is one area that is the most troubling: Our increasing dependence upon government to solve our problems. This trend is eroding the very unique American alloy that was forged from characteristics like fierce independence, self-determination and individual responsibility, beginning in 1619 with the Mayflower Compact.

We can debate, disagree and even fight over certain issues, but there will be nothing to fight over if America devolves into socialism. We already know how that movie ends, because it has been playing out in front of us for a few years now in the European Union, and closer to home in cities like Detroit.

As of now, there are entities with resources to help these profligate governments. But as the U.S. national debt tops $17 trillion and deficit spending projected well into the future, we have to ask ourselves this question every time we spend money we don’t have on things that we refuse to fix, “Who’s going to bail out America?”

It’s not too soon to start asking that question.

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