As I discussed in my last article, “Don’t Grow Yourself Out of Business,” a lot of businesses make big plans for growing sales without making corresponding plans for growing capacity. You can push your people to work longer hours. You can bring in a part-time CFO such as me to handle your increased reporting needs and create a financial dashboard that will let you track things to ensure you’re actually making money. But unless you’ve got a lot of cash, without adequate credit to finance your business expansion, you’re business is not going to expand.
For example, say your construction company is planning to grow by 30% over the next 12 months. You typically get 90% of the progress payment within 60 days and the remaining 10% remains as retention to be paid when the job has been completed by all trades. To accommodate your sales increase your payroll will go up. But until the retention payments start to roll in, where is that money going to come from?
Or perhaps you have a manufacturing company with a 90 day production cycle. How will you pay for 30% more raw materials if you won’t receive payment until 30 to 60 days after the product ships?
You need a strategic
To address this issue, start by determining exactly how much credit you’re going to need. Your strategic business plan should address this by looking at how your sales increase will impact your anticipated cash flow and each of your expenses.
Look at your financed
and unfinanced credit
Do you have unused credit that you can tap now? Are your suppliers willing to work with you to fill the gap? After all, if your suppliers are comfortable increasing your credit and continuing with your current terms, you’re set. But if this is not the case, you’ll need to work on expanding your financed lines of credit.
Give your lender the
information they need
Before a bank or other lender will increase your line of credit, they’ll want to see believable projections showing what your company will do in the next 12 to 36 months. Getting loan approval often depends on getting this aspect of your loan package right. If your internal finance people are not experienced with this, you’ll want to bring in outside talent that is.
Need help with any aspect of this process? Give me a call. As your part-time CFO, I’m here for you.