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One of our clients at the Small Business Development Center – let's call her Allison for the sake of this story – came to see us recently with the question; “My company has been growing 100% year over year, we are selling our products like crazy, we have great profit margins, so how is it that everyone gets paid…but me?”
Allison is smart – VERY smart. She had a great product idea that was innovative and immediately successful from the time she launched her business part-time out of her garage.
To be successful, is it enough to be smart and have a good product? Of course not; there are numerous pitfalls and potential problems that can crop up as you grow, and how you handle those problems is what separates businesses that succeed from those with smart people and good products that fail.
Allison had started by manufacturing in small batches and her product sold out quickly, so she knew she was on to something. Demand for the product grew slowly in the beginning as she focused primarily on retail sales, but she stayed the course and slowly entered the potentially lucrative wholesale market. Two years ago, her product was featured in a national publication, and ever since then she has experienced exponential sales growth.
Here at the SBDC, we call this a good problem to have. Strong sales with healthy profit margins are essential and give a great base to work with. We were sure that with some fine-tuning of her business model and shoring up some of her weak spots we could help her.
If you’ve ever watched the reality TV show The Profit on CNBC, you’ve heard the phrase; “If you don’t know your numbers, you don’t know your business.”
Our first step in helping Allison was to look at her financial reports and gather a broad picture of the financial health of the business. Although she had a ton of financial information and we were able to look at what we needed, it was buried in the details of these reports. So we worked with Allison and her accountant to create a few reports that could be generated automatically so that it wouldn’t take hours to analyze and sift through to understand what was happening in the business.
Success! Once we had easy to obtain, specific and accurate financial information, we could move on to our next step: stopping the cash bleeding.
We worked side by side with Allison to identify a few ways that her well-earned profits were getting “stuck” in her business. In her case, we identified some slow-paying issues; a few large customers were taking longer to pay their invoices. Many of our fast growing clients are surprised to learn how just a few days improvement on the speed with which a business collects on its Accounts Receivable can manifest as real cash in the bank.
Another area of concern was Inventory. We found that inventory levels had grown too large and were not in alignment with her annual sales. So we created an action plan to determine appropriate inventory levels based on sales assumptions and reign in future purchasing of raw materials. We also made plans to liquidate her excess inventory.
More success! By working proactively with her slow paying customers, Allison was able to reduce the average time it took a client to pay an invoice. She was also able to bring her inventory levels back in line with what her current sales would support. These two improvements amounted to almost $100,000 of cash that she could have in her bank account that was currently “stuck” in her Balance Sheet. Her company was stabilized and she had a much better cash position.
Finally, we created a dashboard of the key performance indicators that she now monitors regularly. We plan on working together monthly to fine-tune this monitoring dashboard and identify signs of potential weaknesses before they become critical problem areas.
Allison, and her growing business, represent the type of smart, growth oriented entrepreneur we love working with here at the SBDC. The most exciting part is watching Allison grow more confident and listening to her creatively dream about her next product line instead of worrying and wondering; “When will I ever get paid”.
Even companies with great products that sell well need help from time to time. We were able to help Allison – I hope we can help you, too.