Grow Yourself to Death

By: Sumner M. Saeks, Certified Turnaround Professional
New Growth Advisors, Inc.

A worried voice on the phone says, “We’ve made it this far through the downturn. We have put in all of the money we have.  We have borrowed on credit cards and asked our suppliers for extended terms. Now we can’t buy enough materials to supply the growing orders from our customers. Help!”

We have all heard the horror stories.  Every day companies run out of time and money due to economic downturns, relocation of jobs to lower employee cost economies (off-shoring), lack of management responsiveness to market changes and customer demands, shifting of productive activities from in-house to outside vendors (outsourcing) and other distresses.

Not only sad, it substantially injures US business and contributes to national unemployment levels as high as 7.8%.[1]  Worse, many states are suffering unemployment rates much higher than the national average.  Michigan, for example, is experiencing levels as high as 8.9%.  Further, certain populations are suffering a greater impact.   American’s with less than a High School Diploma and African Americans report joblessness of 11.7% and 14.0% respectively.

Unfortunately, a lack of planning is often the culprit.  Many companies fail due to unplanned or uncontrolled growth.  Imagine a company that closes its doors, seeks bankruptcy protection or is forced to sell to a competitor because it has too much business. Time and again companies can’t afford to hire enough skilled and trained workers or get enough raw materials and services necessary to serve growing customer demand.  Disheartening, but more so, avoidable.

Companies must not only plan for, but also finance growth.  Business managers and owners are well advised to prepare for the worst but plan for the best. You surely need contingency plans for downturns and economic dislocations, but what about your growth? In today’s lackluster economy this seems improbable, but our firm is getting more inquires from potential clients who have weathered this sever, multi-year downturn.  These businesses have worked hard to fund losses and raise money to pay employees.  Customers are well served by increasing productivity and continued innovation.    However, many of these same businesses depleted capital to get through the downturn and now can’t fund working capital needs to meet customers’ growing requirements as the economy continues its slow expansion.

These businesses have successfully managed capital to get this far.   However, access to additional capital is needed to buy inventory, meet payroll and ship products or provide services. Unfortunately, capital may not be readily available.

How does a business succeed?  Take a step back, determine the current situation, cast goals and create a plan.  Is it necessary to raise some equity capital and then obtain senior or mezzanine debt financing to provide the capital for these uses?

Steps to Take:

• Create a monthly forecast including a profit and loss statement, monthly cash flow and cash requirements;
• Determine how much cash is needed to fund forecasted growth in inventory, accounts receivable, payroll and other operating costs;
• Determine whether this cash be freed up internally by accelerating accounts receivable, increasing inventory turns, or extending payments to vendors;
• Consider working with owners to infuse the necessary equity to either fund these cash needs or be used to leverage the balance sheet with a banking partner, providing senior debt, or a mezzanine lender to provide subordinated debt funding.

Seek a financial advisor’s assistance in creating these forecasts and determining the proper balance between equity and debt funding for your company.

Proactively plan to serve your customers. You must prepare for your success.