The Boss of You

This financial conundrum has had me stumped and frankly a bit in denial for I’d say the better part of the last year. Since our business has grown (something we’re very grateful for) every year, and continues to grow in revenues it seems like we need more and more credit to get by every month and for a long while I thought that as the finances gal in the company this meant I was just doing something plain wrong. But after being talked off the proverbial ledge by a few mentors and trusted business advisors, and then having it put very plainly to me by our new and lovely business banker, I think I’m finally getting it through my stubborn head. A bigger business (even when more money is coming in) will almost always need access to more credit, and that doesn’t mean you’re a failure as a business person.

I know I already touched on this in my recent post on getting a business banker but I want to be really clear for those of you, who like me get the wiggins when you think about debt. As your business grows the following things are going to start to happen all of which don’t mean that you’re a bad business person or that  your business is teatering on the brink of extinction just because you’re more into your line of credit than you paid yourself in the first three years combined:

• Your expenses will go up: rent and salaries for pretty much everyone, stock costs or materials for retail/manufacturing, insurance, etc. The whole it costs money to make money thing is true, even for the most DIY of us, as after all there are some things you just can’t DIY as it were. (In our case, I don’t think our employees would appreciate a salary IOU even if it were done in fabulous needlepoint).
• Your revenue stream will change: this is particularly applicable to service based businesses. In our case, the contracts we’re working on are much larger than they were back in the day. So when we’re waiting on 2 outstanding invoices the combined value of those might be in excess of $40,000. In the good ol’days of yore that would have been much more like $4,000, so in those days a smaller line of credit would get us through until the cheque was not just in the mail but in the bank.
• Your taxes go up: the higher your sales, the higher your tax bill. And while you wait for money to come in from work you’ve already done, the tax folks want to be paid on time. And they’re really awfully fussy about that one.

All these things add up to your need for a cashflow buffer to be much larger, even if you’re earning more money. The secret is to make sure you’re dipping in and out of your line of credit/loans and not just wallowing in them month in and month out. A good way to tell if you’re being overwhelmed by your current line of credit or other easy access debt: if your currrent accounts receivable is larger than your current debt: you’re more than fine, you’re in the top 10% of businesses.