You can’t manage what you don’t count
What company wouldn’t be thrilled to see a doubling of revenue year over year? Triple would be even better! Most would be counting their blessings to see an average of 35% per year over many years. Certainly such numbers would eventually provide the owner with fast cars, exotic trips, and a gold Apple Watch. Or Not!
Most companies that experience such growth are headed up by owners who have never done it before. They have never had this many employees, this large of an accounts receivable or payable, this much of an outstanding loan, or this large an overhead. For the purposes of this post, we won’t consider the huge issues surrounding knowing how to hire and train managers, or the even more difficult task of giving away responsibility or authority. We’ll just stick to numbers.
What could possibly go wrong?
Margins – When sales are exploding, there is potential that supply lines will be strained or internal efficiencies will be sacrificed. There are many ways that cost per unit can go up as inexperienced staff is added, equipment is stretched beyond normal, and inventory management becomes sloppy. Shrinkage may increase due to dead products.
Any or all of these things might make a 5% or more difference in margins. Even a 5% drop could dry up profits or result in losses.
- Evaluate each new product to make sure that you at least take into account the potential effect of smaller margins compared to historic margins.
- Watch monthly stats on margins to catch slippage quickly.
- Get rid of items destined to become museum pieces fast.
- Evaluate the possibility of slowing your sales increases if supply lines or internal inefficiencies are hurting margins. Alternative: take the lowered margins into account in budgeting and planning.
- Increase prices to increase margins. Sales may suffer, but sales don’t appear to be the issue
Accounts Receivable – If you are a manufacturer, wholesaler or other company that gives terms to your clients, increasing sales results in increasing receivables. Having more outstanding collections to manage increases the potential for those receivables to start getting older, and thus harder to collect. But, just in general, the amount of your loan to your customers is a drain on your capital.
- Get weekly reports on total aging and specifically all accounts over 60 days.
- Budget the total % of sales that you expect to be in each aging category. Jump on any situations outside of budget.
- Give discounts to encourage early payment.
- Evaluate cash flow analysis to see at what point budgeted receivables will outstrip your ability to finance them.
- Fire customers that are not staying within terms. You hate to lose them, but the best time to trim the customer list of unprofitable business is when you are growing like crazy.
Inventory – One might think that getting too much inventory would never be an issue in the fast growing company. That is partially true. The hot selling items are probably turning 12 or more times per year. But the problem comes with slow moving items that take a long time to arrive. It is easy to purchase a huge amount of product into the pipeline, and then have far fewer sales than expected on that item.
Even the good selling products could end up creating a substantial amount of cash tied up in raw materials, work in process, or product on the way. The cash may now be tied up in inventory and receivables, and the combination can be devastating.
- Budget inventory including all product that is contracted for. Evaluate in terms of when payment needs to be made. Spread this out by month, and budget what you believe you can afford to pay each month.
- If asset growth is outstripping available cash, cash will have to come from better terms on purchases, borrowing, and/or an infusion of equity.
- Maintain inventory budgets by line item. Cut purchases quickly as needed.
More like this on our next post.
If you would like to reduce your risk by carefully counting all the beans related to your business, contact ATPP today and let us help you set up systems that will add to your profits. Call 818-436-2775