An Initiative of the City of Akron

Monthly Archives: July 2015

When cash flow is a challenge, get creative

jim_square

If you’re in business and have anything to do with the finances of the company, you most likely have heard people say that cash flow is the lifeblood of businesses. Well, they are right – it truly is.  Without it, things can come to an abrupt halt, interrupting important technical developments. In fact, stable and consistent cash flow is essential to protecting your business assets, sustaining an effective operation and retaining employees. 

But sometimes, your company may have to make tough decisions and look to unconventional sources of financing to pay down debt, make payroll and otherwise grow your company.

Some years ago, I was asked to take over a cardiology startup company that had hit the wall.  The sale of the company’s first product was starting slowly; the salesforce was too big for the introductory level of sales; the company could not pay its current bills; and it was choking on a small mountain of debt.  For all practical purposes, the company was D.O.A.  I wasn’t sure whether my immediate job was to save the company or arrange a gracious burial.

And then Stuart walked in to help me assess the company’s options. Stuart was with one of the investors.  He was a magician with operations – particularly cash flow.  In quick order, we had assessed the sales pipeline and re-forecasted a realistic sales level.  Then we had to take two initial important steps, in Stuart’s words, to “cut the cloth to fit the body.”

We had to right-size the sales force: Expenses had become a huge portion of the monthly burn rate. We evaluated the sales team and made the difficult decisions about whom to keep and whom to let go. This is never an easy task, but particularly so for the new “boss.” 

We reviewed operating expenses: We made immediate changes here and ended up with a positive cash-flow operation forecast going forward.   

However, we hadn’t dealt with the company’s debt. Most of it – about $375,000 in the early 1990s – was owed to vendors and suppliers we still needed to operate our business. Without a plan to address the debt, we would cease to exist. Stuart gave me some clues, but told me to figure it out on my own, which led to a third step.

We leveraged relationships with vendors and suppliers: With equity capital too far away and the ability to raise it uncertain, the only way to control our own destiny was to “borrow” from the vendors and suppliers we already had. I called each one of them and met with everyone I could.  I told each of them the same thing – if they would agree to the same plan, we could proceed. The terms included:

  • All 22 vendors and suppliers – 100 percent of them – had to agree to the same plan.
  • We agreed to pay COD (cash on delivery) for all new purchases and to pay the accumulated balance off over a 15-month period.  (Incidentally, the balances were not paid linearly over the 15 months; they started small and ballooned up near the end.) 

If all of these key vendors and suppliers did not agree, it was going to be over. But they all agreed to the terms and the company made all payoffs in the full amounts. We needed to re-negotiate the payoff plan several more times.  Once we established a short track record of paying what we’d said we’d pay, things changed.  We received tremendous support. It wasn’t always pretty, but the payment plan worked and the company lived to fight another day. 

The same basic principles hold true more than 20 years later. Recently, I helped a company here at the Accelerator that could not find any way to pay for its startup equipment. The founder arranged for enough working capital to sustain him through most of the projected initial period, but did not have enough to pay for the equipment he needed from a critical vendor. We called the equipment supplier and after some wrangling, they agreed to a 50 percent up-front payment and a payment of the balance next year. The balance is essentially on an informal lease – the company will not “own” the equipment until the second payment is made. The “loaned” amount was the missing capital that this company needed to launch.

Startups have many challenges – cash flow being one of the largest. But like everything else founders and their management teams face, creativity is a skill that most, if not all of them, possess. In situations where cash flow is a challenge, using that creativity to get out of the rough spots will go a long way toward keeping the company viable and growing over the long term.