Cash Management: The Hidden Ingredient
Virtually all of us start a business because we see an opportunity and a demand for something we can provide.
Let’s take what we learned in our first set of videos on profit and assume you know how to price your product and be assured of a net profit.
Btw - we are going to further study net profit later – but suffice it to say, a decent net profit for your company is your ultimate goal.
I’m Mike Johnston with us invoice funding – we fund our clients’ invoices; and they become more profitable as they pay their bills quickly and make payroll without stress.
Most of my clients fall into two categories.
Their cash and capacity is modest compared to demand for their product. And/or
They are constantly stressed making payroll and paying suppliers.
In both cases they can be profitable but demand to fund obligations outstrips the pace of customer payments.
I want to take a moment and address #2 for just a moment. Quite often these applicants are not profitable and either - they don’t know it or – they are in denial about it. We determine a client’s profitability or potential for profitability very quickly – and we are transparent with out findings.
If you are not profitable – I’m going to let you know it first thing. I will also suggest a change of course.
Let’s consider a company that is billing $100,000 a weekly and their customers pay in about 30 days. Their COGS is $65,000, of which labor = $40,000 and materials = $25,000. Additionally G&A is $22,000 (22%).
That means net profit is $13,000 (13%) – that’s pretty good. And by all accounts they should be doing just fine – thank you very much – however there is one problem
They don’t have enough cash to be profitable. Let me explain -
By my calculations this company will need about $500,000 in available capital (this is known as equity) to survive – how so?
Well – they have total monthly cost of $377,000 ($65k+$22k=$87k x 52 / 12 ). Along with an additional week of production = $377k + $87k = $464k before the 1st payment is due to arrive – and man, it better arrive. Also, when the $100k check comes, there is no real relief – because this company needs $87k of that check immediately.
Most companies launch without enough capital. And many of them experience a net loss as they begin. Therefore, their reserves are gone and once they start generating profits, the demand for cash never seems to subside. The result is a grueling pattern of demand overwhelming cash on hand. It also explains why the vast majority of small businesses fail to survive for five years.
We don’t want our clients to survive – we want you to thrive – pay your bills, make payroll and take something home.
Here is an alternative – take advantage of factoring.
Same company different outcome -
Ok let’s take what we know -
Our COGS & G&A is $87,000 per week
We are invoicing our customer $100,000 – but number 3
We are going to receive an 85% factoring advance against that invoice.
Now, our required cash contribution is $2,000 for the week
By week five – when we receive our first payment – we have no funds invested and $45,000 in projected accrued net profits.
What’s more if you run this scenario out for six straight months – by the six month
You are $300,000 ahead using factoring.
Don’t believe me – check out our next video – we will review a week by week chart comparing both approaches of cash management one requiring equity – the other using factoring
And remember – if you are doing well – lots of business – lots of invoices – but you are running short of cash – give us a call, we can help.
I’m Mike Johnston with us invoice funding and i look forward to talking with you to learn more about your financial goals.
View the corresponding video on YouTube!