Before you take the aspirin (business loan), figure out what is causing the headache (poor cash flow)
By Eugene E. Valdez AKA The Loan Doctor™
Many of my clients hire me because they are suffering from “poor cash flow” and they think the solution is a business loan. There is a reason I call myself The Loan Doctor. My approach in serving clients is analogous to what a medical doctor does for his/her patients.
Initially I make a diagnosis of my client’s current financial health or “lendability” since they are seeking a business loan. The first aspect of my diagnosis however is to determine what is causing the poor cash flow. If I choose a “remedy” of a loan to treat the illness of poor cash flow, then I am only addressing the symptom and not the underlying cause of the poor cash flow. That is a critical distinction. Unless I know why my clients are continually “getting headaches” recommending aspirin will make them feel better for a while but they will never be fully healed.
Further, once I determine the cause of poor cash flow I am now in a position to recommend multiple remedies which may or may not include a loan. Interestingly enough there is a number of causes of poor cash flow, some are obvious, some not so obvious.
Here are some of the causes:
Seasonality in sales patterns: If your business has dramatic swings in monthly sales, cash and AR collections, cash flow will be weak in the slow months. You might be hard pressed to meet your monthly fixed costs.
Long term annual sales growth: If your clipping along at annual growth rate of 15% or more your cash flow will be strained as you will have to continually feed the beast in terms of more employees, more equipment, more inventory, more space, etc.
Marginally profitable: Poor profits and poor cash flow go hand in hand whether your selling terms are COD or net 30 days.
Slowed AR Collections: This is the obvious one. Everyone CEO knows that if they are not watching their AR agings very carefully and let them string out, their cash flow will stink.
Bad Inventory Buys: Inventory purchases resulting in slow movers or “dogs” ties up cash and retards cash flow.
Too Much Equipment Purchased: If a lower level of equipment can produce the same level of sales, you have mismanaged your capital expenditures program and your precious cash. Once you sink your cash in unneeded equipment that cash is gone, unless you sell the equipment (Or take a loan against it).
Not retaining enough profits in the company: Many business owners take out too much salary or take too high of distributions, (if they are a S Corp) which limits the amount cash and cash flow that they could of kept in the company.
If you cannot figure out a way to overcome these poor cash flow causes you may have to resort to financing… but financing comes in many forms not just business loans.
Here a few of those options:
- Vendor credit/AP: Can you stretch them to 45 or 60 days rather than 30 days?
- Business credit cards: Watch rates and hidden fees and make the payments on time.
- Owner loan to the company using personal funds: Are you tapped out?
- Accrue paying certain expenses every month: Not payroll taxes!
- Report more profits and retain a higher % in the company: You will have to pay more taxes but you will be financing your company’s growth with your profits, talk to your CPA, this is huge factor.
- Obtain a line of credit from a lending organization: Be wary of high interest lenders. Are you currently bankable or lendable, there is a difference. Bankable will allow you to attract low interest rates.
- Obtain a short term loan from a family, friend or private investor: Hardest option of all, make sure you create a legal note.
Good luck, strategic cash flow management is the key to being a successful entrepreneur. However, if you get stuck, take two Tylenol, use some ice and call me in the morning.
Eugene Valdez is a 40-year veteran of business/financial management and owner of The Loan Doctor, a full service business loan consulting firm based in Upland. He can be reached at email@example.com.