Tag Archives: Credit Line

How Do You Plan Spending – to Backlog or Sales Forecast? Five Suggestions

Situation: A company had several huge orders last year but ended the year with a low backlog. Sales forecasts are rosy, but acceptance of proposals and initiation of work is hard to predict because the company’s products are just a piece of much larger projects with variable timelines. How do you plan spending in this environment – conservatively to backlog or more aggressively to the sales forecast?

Advice from the CEOs:

  • It is important to understand the magnitude of difference between spending under the two scenarios. For example, if a conservative spending plan means major cuts to product lines or business compared to the more aggressive plan, then analysis and what if scenarios are more complex,
  • What are the company’s cash-flow and debt situations. If you are cash-flow positive with little debt, this increases flexibility. Another consideration is the company’s attitude on debt.
    • Be wary of the healthiness of an unused credit line. Companies have seen unused credit lines cut and accounts cleared when they have started using the lines after a long dormant period.
    • Exercising the credit line may increase flexibility.
  • Look at your approach to forecasting and spending. How far out do you forecast? How effective have past outgoing forecasts for several quarters been, and what confidence can do you have for the next quarter, the quarter after, and the quarter after that?  If you are reasonably confident one quarter out, you can plan spending on this. If you can adjust spending relatively quickly this gives you more leeway.
  • Establish leading indicators to improve future forecasts.
    • What is your win/loss record on proposals, and a conservative estimate of what this ratio means for revenue?
    • Other examples include sales calls to new customers versus new key customers won, and similar sales metrics. These metrics can help to govern expectations based on sales forecasts.
  • If your sales team is not performing, look at changes to sales management. This may wake the team up and prompt them to go the extra mile for contacts and contracts.

Key Words: Forecast, Backlog, Spending, Planning, Cash-flow, Debt, Credit Line, Confidence, Indicators

How Do You Boost Short-term Cash to Finance Growth? Two Approaches

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.

Key Words: Cash-Flow, Bank, Credit Line, Payments, Payables, Vendors, Early-Pay Terms, Terms, Inventory, Depreciation