Cash flow can “Trump” sales for business growth

I was talking to a friend of mine who owns a small security services business and his story was one I hear a fair amount so I thought it was worth sharing.

To me he has a classic issue – cash flow management. If someone looked at his business from the outside they would get an entirely different view than what is going on “under the covers” on the inside. Even with the recession in full swing he has managed to increase sales by about 10 – 20% each year – remarkable I know. He has also managed to control most of his short term expenses by not bringing on new employees but getting more out of his existing staff – which they are glad to do to keep busy.

If you look at it from an accounting side, he is also quite profitable. His profits are measured by the traditional methods of EBITDA and with everything going on in his business, it shows things are in great shape. But for some reason, he is struggling to make payroll and pay some bills. How can this be?

Upon further analysis, there is one small area that many overlook when viewing the “health” of the business and its ability to even survive – CASH FLOW. The part that doesn’t come out in the numbers is how much he has to pay for past debt management, past property acquisitions, paying off some previous owners, and most importantly for a growing business is the investment in working capital. He is living month to month and to a point of maybe pulling personal money into the business just to keep it running.

This is one area that during difficult and even very prosperous times needs to be analyzed at depth and managed closely. This small area to some can bring down a business faster than many other obvious factors. My advice to him was to put in place a cash flow forecasting process and update it frequently. Additionally, it makes sense periodically to reassess the capitalization structure of a business to assure that the business has enough capital to achieve its business plan. This small change in his business will probably have a bigger impact than increasing sales by another 20%. It pays to notice the little things along the way….