Funding Your Business1 Jun, 2012 imageSource
It is no mystery that many businesses fail not because they lack revenue or profit, but because they lack cash. Growth companies can actually be profitable at the time they go out of business, with failure being an issue of liquidity - not profitability. Broadening your company’s services and programs, such as the investment or start-up costs for establishing a managed print services program to better service your customers as the total provider, need working capital.
By now, you are thinking of finishing this year’s plan successfully, but also, if you haven’t started planning for next year’s fruits, don’t wait. Most importantly, make sure that any growth can be funded appropriately. As many find out as they enter the planning stages, a lot more cash is required for growth than anticipated.
Now let’s consider this: boom and bust may appear to be opposites, but they’re opposite sides of the same coin. Both consume cash in huge quantities. Obviously, companies that have lost significant revenue, been unable to reduce costs, or experienced major bad debts become prime candidates for bankruptcy.
On the other hand, growth companies, while increasing sales and often generating more profits, also increase assets, which require more cash to finance working capital than their profits can provide.
The solution is not a no-growth policy. Not growing as the market improves means declining market share, missed profit opportunities and lower value. A lack of growth precludes efficiencies and economies of scale. It reduces opportunities for employees; even customers may well question the future of a company who is not growing.
The solution is controlled growth - growth that focuses on cash before volume; that concentrates on main profit contributors, and minimizes the costs of growth by effectively managing accounts receivable and inventory. Controlled growth is knowing just how much you can afford to grow, then anticipating and planning for that level of growth.
Also, know percentages of what your services/products can do. For office solution providers of managed print, consider that: No matter how large or small, a typical business will spend up to 3% of its revenue on printing. Know the revenue of your clients to calculate output.
Determine Cash Requirements
Of course they are multiple steps you’ll encounter when developing or growing your business. The following 5 steps are necessary for you to determine the cash requirements for the growth you anticipate.
- Identify your incremental growth for the coming year and the total volume you think can be achieved in terms of sales and gross margin dollars. For contract deals that are subject to peak and valley periods in terms of revenue, identify volume on a quarterly basis, not just annually. A key factor is identifying lags between your payments (cash out) and your receipt of funds (cash in). An annual growth of 10% could mean quarterly fluctuations of 25% or more.
- Estimate your expenses and resulting profits associated with that volume.
- Determine the amount of assets required to support your forecast, particularly accounts receivable and inventory. To project various asset levels, it is necessary to forecast your collection period (day’s receivables outstanding) and your inventory turn.
- Estimate liabilities including your level of debt. Bank covenants may restrict additional borrowing.
- Based upon the assets, liabilities, and equity (net assets) projected, determine whether you have a cash surplus or deficit. If your projections show a deficit, determine whether the cash shortfall can, in some way, be financed externally by additional debt or equity financing, or internally through higher profits, improved collection period and inventory turn.
Assess your costs of growth — knowing how much you can and should grow, and commit to priorities: cash before profit, liquidity before earnings, and balance sheet before the income statement.
Still Thinking of MPS?
Dealers looking to add managed print service for the first time still can – but don’t wait much longer. Evaluate this thoroughly, however; and on what level can you effectively “handle” providing managed services. It takes money, commitment to this initiative, patience and real know how (hire a consultant to assess if this viable for your type company prior to commiting).
After evaluation, than develop a credible plan. Realize what it costs, what you can make, and how much you need to sell to get there. Know the resources you can commit to it, such as in sales and marketing to get your message out and your name recognized in this space.
Start this initiative with your small, current customers first. You have traction here and it isn’t as overwhelming as a large account. Realize you will initially make some mistakes– but learn from them and grow stronger. And remember that managed print is a net-add revenue.
Focus on MPS among other services provided to your customers, but do realize you need to have a dedicated sales staff. It has a longer turnaround time and a method of compensation needs to be addressed. Don’t just tack it onto a sales reps list of services to get sold; otherwise it won’t. Find a champion or create one. But remember that one of the most common mistakes is to assign people certain responsibilities in the managed print portion of the business, and then their managers and leadership don’t follow up accordingly. Team work is necessary.
Managed print is a company initiative, and there has to be focus on it specifically. If a prospect is engaged in a managed print contract elsewhere you likely won’t get that anytime soon. So go find the many available that are not yet under contract, including those in your base. Get them under a managed print contract before someone else steals them right under your nose. Don’t let that happen. The window for MPS is still open…but insightful providers know that it is slowing closing. Get going or move to tackle another initiative. Managed Services, anyone?
Assess Core Growth Potential
One key to this type analysis is understanding how much investment is required to fund this growth. Few areas of the market are bursting at the seams, but most companies and industries have at least some growth potential over time as the U.S. economy expands (figure 3%-4% per year plus inflation) and emerging markets open up. Inflation can be a tailwind, too - though taking price increases for granted with manufacturing organizations is not necessarily a good idea. Fortunately for most mature businesses, supporting a baseline level of growth is relatively inexpensive, and therefore possible high return expectations.
Another and often simpler way to think about the cost of growth is to look at a / your company’s free cash flow as a percent of net income. Since free cash flow includes the cost of capital investments that support growth initiatives, the difference between earnings and free cash gives us a sense of the cost of growth.
For example, let’s say free cash flow consistently totals about 60% of net income, while sales and profit growth run about 6%. This suggests that only 40% of earnings will support this growth, leaving the other 60% of net income available for debt reduction or other noncore investments.
How much will achieving a certain percentage of growth cost? One of the simplest angles is to take the growth we expect (say, 5.2%) and divide that by a representative return on equity.
Aftertax return on invested capital is also worth a look.