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.