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As a veteran banker and former business coach of over 30 years I have had a successful career by positioning myself as a “Banking Physician” with my current customers and prospective customers. Many of my business clients and prospects suffer from the “illness” of weak cash flow and usually believe “the proper medicine” is a new line of credit or an increase in a line of credit they already have. Many bankers take that approach to satisfy their customers need.
As a self-proclaimed “Banking Physician”, my philosophy has always been “don’t focus on treating the symptom, (a loan for poor cash flow) but instead focus on the root cause of the poor cash flow. It is possible that you as a business owner, working in conjunction with your CPA or banker can determine what is causing your poor cash flow and if so you “heal it” yourself. You may not need to borrow any money at all, and in the process not incur any loan interest expense and thus preserve your profits.
My personal banking business model works like this. Like a physician I interview my business patients and ask “where does it hurt”, how are you feeling, i.e. “how is your cash flow doing “. Then I run a series of tests which is essentially a review of your financial statements and the calculation of a few selected ratios which I believe are barometers of “ good business health.” I check your business’s “blood pressure”, cholesterol, blood sugar levels etc. so to speak.
At the conclusion of this step is I am then in the position to communicate to my clients my “diagnosis” as to what I believe is the root cause of their unhealthy cash flow. After that like any doctor, I outline what I think are the appropriate remedies to make your business cash flow stronger and healthier.
Dealing with my entrepreneurial patients I have found that some of most common causes of poor cash flow are the following:
· An increase in the number of days it takes to collect their accounts receivable
· Explosive sales growth, ( plus 20 % annual growth)
· Slow moving inventory or unsalable inventory.
· Overspending in the area of new equipment or other fixed assets
· Excessive owner compensation or distributions
· Eroding net profit margins
· Failure to make quick adjustments to SG& A expenses if they face of declining revenues.
· Owners do not prepare cash budgets or forecasts with a special emphasis on the “budget versus variance report”.
Many of these root causes of poor cash flow can be “cured” with a little attention and proactive strategy. For example rapid sales growth puts a strain on working capital because sales growth requires a larger investment in ARs and inventory which have to be financed by either terms from your vendors, accrued short term expenses, your own retained profits or a bank line of credit. Maybe if you slow the growth down to a more manageable level you can finance the growth with the sources I outlined above without the necessity of a bank line of credit. Is there anything wrong with growing at 10% versus 20%?
In summary, review the list of causes of poor cash flow I outlined. Get with your CPA or banker to help you address what cause you think might be applicable to your business. If after that, your cash flow is still a little “under the weather”, no problem. call me ….. as a Banking Physician I took an oath to make “house calls”.
Eugene E. Valdez is a SVP with Pacific Mercantile Bank which serves entrepreneurs in the Inland Empire as well as the greater Southern California area. Eugene Valdez can be reached at [email protected] or 909-743-9203.
By Eugene E. Valdez
