Tackling the Cash Flow Problem - Part 2 of 3
In part 1 of this series we laid out a typical cash flow scenario for a small business. The order was a good one with a 40% profit margin, but through the course of production and delivery our company found itself deeply in the red and having to finance all the labor and materials required. No mistakes were made; it was just part of doing business.
Before we more on to the analysis of our cash flow challenge, let's take our small business story one step further and see what happens when we land a really big order.
The Big Order Problem
As you remember, our small business is used to doing $10,000 in sales every month. We've learned to manage that and have adequate cash supplies and financing in place to do business.
Suppose now that our business gets an order for $100,000, ten times our usual monthly amount. This is a great problem to have, but it can also be very dangerous for a company if they don't manage it right.
The first challenge is that we probably need to negotiate some extra time to fulfill the contract. Let' say the customer agrees, three months to deliver instead of the usual one.
Now we need to line up additional staff and larger contracts with our vendors. Chances are that since our vendors are not used to such large orders from us they are going to want some sort of down payment to insure the order. That's a little more money we need to find up front; more financing.
At the end of the day ten times the orders means ten times the financing. Our small business is suddenly faced with financing $60,000 this month instead of the usual $6,000, and the term is going to be 90 to 120 days instead of 30. That's going to raise some eyebrows at the bank for sure. Do we have the credit rating to warrant that amount? We may well be able to get it, but not without bringing more information to the banker. They will want to see a business plan with things like a copy of the order, insurance, and a background credit check on our big new customer. All things that can be provided, but the situation needs to be managed.
And finally, what happens if we something goes wrong and we fall behind in production? In our small business example we may no longer be in a position to bail out our company using our personal finances. In a big company the same think can happen. If our project goes wrong, and either the bank or our customer looses faith in our ability to complete the order we could be in a position of having to lay off staff or shut down the business altogether. More than one big company with a healthy balance sheet has declared bankruptcy as a result of poor variable cost, cash flow management.
Summary
Getting a big order is not a disaster, in fact it’s cause for celebration. But an unusually large order does require close management to become a success. Before you leap in take some time to work out the likely cash flow scenario to make sure your business can handle it. Big orders are great if they are managed right, just be prepared to with your financing options and business plan.
In part 3 we analyze our cash flow scenario and lay out some practical management tips for managing business cash flow.
About the Author: Daryl Cowie has shared management tips with 1000s of people in over 30 countries around the world. His mission is to help you and your company turn business opportunities into business realities. Sign up for his free business management home study course at http://FreeManagementTips.com
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Print Article | Download PDF | 38 views | Apr 08 2008
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