Situation: A CEO has identified a new business opportunity that looks promising but will require raising additional cash short term. What are good sources of short term cash, and what will simplify access to these resources? How do you raise cash short term?
Advice from the CEOs:
You must be the biggest critic of this opportunity. If it doesn’t fly to your critical eye, it will be hard to sell to others. As a reality check, ask yourself whether the opportunity is something on which you’d bet your house.
Build the new capability around a web distribution system that compliments your other capabilities. This broadens the appeal of the offer.
Generate an investment proforma and revenue stream. Most investors or debt financers will want to see this. You can position it as an immature business plan backed by your best estimate of the numbers.
You’ll need a business plan unless you’re lucky enough to find someone who believes that you can turn any opportunity into gold.
Presell subscriptions to target clients to prove the value of the offer – both to you and for investors.
Assure that any payments due from you go into an escrow account, to be released on a quarterly or other phased basis pending performance from the other parties within this deal.
This is not a venture capital story. Angel investors will seek a lower return for lower risk than VCs. Set some milestones for the Angels that will help them to see that you are monitoring their risk.
Situation: A company is frequently short of cash at payroll time. It has good revenue and profitability, but timing of receipts can make it difficult to meet payroll. Are the CEO and CFO doing something wrong, and what changes should they look at to better manage cash flow needs? What are best ways to boost cash flow?
All financing begins with your cash flow pattern! Your ability to manage cash flow is the foundation of credit worthiness. It is both a reflection of past performance and specific future performance expectations.
What can you do to optimize your situation?
First – put your own house in order!
Review your business model and the aspects of the business model that are causing cash flow challenges. Based on what you find, fine-tune your business model and its cash flow capacity. If receipts are the challenge, work with your customers to focus on timely payments.
Understand your financing needs in their full context. What short-term financing options are available? Will your bank offer you better terms on your line of credit to keep your business.
Stop, think and analyze before you act.
Framing: View the problem in its full context!
Alternatives: Consider all relevant choices!
Trade-offs: Get more than you are giving up!
It is important to fine tune your business model, not just in slack times when you have the time, but also in good times so that you are well-prepared for the next slack period.
When times are flush, set aside funds to invest in analysis of your business model.
Special thanks and in memory of Eric Helfert, PhD for his advice in this discussion.
Situation: A company faces dual challenges – assuring that payments are collected for work done and developing a business model that facilitates growth. How do assure that payments are collected to support your cash flow needs and that employees are focused on growth?
Advice from the CEOs:
It may be that the two problems are closely related. Ask whether your compensation and incentive system is focused on cash flow and growth. If not, you need to change it.
Restructure your compensation and incentive systems to create a direct link between profitability and compensation. Augment this with training. For example, if your engineering team isn’t good at assuring that change order costs are paid by their clients, teach them how to write statements of work to anticipate change requests and to include charges in the SOW. Then tie the team’s compensation to how well team members follow though in assuring that work is properly accounted for, billed, and payment collected.
Create simple procedures that are innate and complementary to team members’ natural behavior. The best way to do this is to involve them in the writing of the procedures.
Give them easy tools that take the guesswork out of negotiating change orders with clients. For example, if a client asks for faster delivery, give them a formula that ties delivery to cost::
Standard Delivery = 8 weeks at Price X
4 Week Delivery = Standard delivery price times Y
2 Week Delivery = Standard delivery price times Z
This turns client demands into a simple economic question – what is expedited delivery worth to you?
Hire a contracts manager to track contracts and change orders with authority to assure that change order costs are being billed.
Create “learning” teams to develop solutions. Allow the teams to speak to each other and to learn each other’s best practices. Supplement this with regular tutorial sessions to bring the whole group up to speed on new technologies.
Situation: The Company is seeing an upswing in work and backlog, but doesn’t have cash on hand to support the work. The bank won’t increase our credit line. How can we increase cash flow and better position ourselves with the bank?
Advice from the CEOs:
First, try to speed payments from customers or delay payment to vendors.
Add a schedule of values to contracts to prompt earlier payment. Sweeten early pay terms.
Ask for money up front to cover out of pocket costs.
Ask vendors for additional time. They’d rather be paid later than not paid at all and can be surprisingly supportive if approached honestly.
Negotiate terms with customers and suppliers in advance. This gives you additional information to take to your bank.
Slow down longer pay term sales by raising prices to finance your cash flow needs.
Study the ratios that your bank requires in your line of credit agreement. Adjust assets and expenses to fit these requirements.
Can you time your sales between quarters to smooth performance?
Update inventory counts. Look for uncounted inventory.
Look at your equipment. Have you been expensing or depreciating it? Shifting big items to a depreciated basis can benefit cash flow statements.
Once you’ve gathered this information, see if your accountant can update or restate recent statements. You may be able to generate enough impact to go back to your current bank or approach a new bank to secure a larger credit line.