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How to fund your business; your MPS program

28 Oct, 2011 imageSource

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. How to fund your business; your MPS program.

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.

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.

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.

1. 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.

2. Estimate your expenses and resulting profits associated with that volume.

3. 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.

4. Estimate liabilities including your level of debt. Bank covenants may restrict additional  borrowing.

5. 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.

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