NORTH BAY BUSINESS JOURNAL EVENT

2008 Going Green Conference: Building, Technology & Practices

Thursday, October 9, 2008, 7:30-11:45 a.m., Doubletree Hotel, Rohnert Park

E-Mail Express

Name:

Company:

E-mail:

Phone:

When ramping up a sales effort, terms, cash flow are key

ALLURE OF BIG CAMPAIGN CAN BLIND OWNERS TO DANGERS LURKING AHEAD

(Editor’s note: This column is part of a continuing series related to the financial challenges of accelerated growth, and in this case highlights the value of thoughtful pricing and financial analysis.)

“Get the habit of analysis – analysis will in time enable synthesis to become your habit

of mind.”   – Frank Lloyd Wright



During the last few weeks, John Wilson, CEO of Ace Business Stuff, has been updating his forecast. Following his last conversation with Lary Columnist, he became concerned that seeking a minority investor might not be the solution he imagined. He called his controller, Tom Sampson, so they could take a final pass at their forecast before visiting the bank.

“Tom,” John said when they gathered in the conference room with the forecast projected onto a near wall, “I’ve looked over the forecast and I think you’ve done a good job of pulling together the details. I still have a few questions about the promotion programs we’re launching and our inventory management initiative. Then, I’d like a tour of our balance sheet so I can understand some of those concepts better. I realize now that our story can’t be only about our projected revenue and profitability, or just our cash flow. We also have to defend the strength and stability of our balance sheet.”

“I’m glad you mentioned the promotional program, John. The key element, as always, is the revenue projection and whether the special discounts and extended terms are realistic. I’ve used the projections that the sales department provided and which you blessed. Do we have any better information now?”

“No, Tom, I think that’s as close as we can get. I talked to Fastlips, you know, Sammy Fastowich, our sales manager, and he seems to think they’re pretty accurate.“

“All the more reason to doubt the numbers, if you ask me,” Tom said. “I don’t think he could hit a sales projection if it was pasted to his, well, you know what I mean. He’s always, shall we say, a little ‘exuberant’ about his expectations?”

“I know, Tom, but I’ve gone over them and while I adjusted a few of them downward, I can’t get them any closer. The reality is that until we launch the first one and can gauge the reaction, we can’t do much more to anticipate the results. Is it really such a big deal, anyway?”

“John, I’ve prepared a schedule that illustrates the cash impact of different campaign results. The results of a 500,000-unit campaign on the special product we’ve developed are not very impressive in the first place. We earn only $75,000 or 6 percent on the $1.25K revenue that it generates. I have a more detailed schedule that we can talk about if you have time.”

 “How is that possible? We’ve got special pricing, special terms, a lot of solid advantages to support this program.”

“Yes, John, but this is another example where profits and cash diverge and certainly don’t follow the same timeline. First, we have a lot of so-called ‘campaign’ expenses for marketing materials, a big advertising program.”

“Yes, Tom, but we’ve already agreed that this program creates a runway for much stronger customer penetration and opens the door for many opportunities down the road.”

“You’re the expert on that, John. I’m only pointing out that those potential advantages come at a price. The campaign expenses are not only high, but we’ve boosted the sales commission to create an additional incentive and have granted our customers an additional 30 days to pay us.”

“We’ve gone over that, Tom. This time we made sure that our supplier supports our program and is granting the same extended terms to us.”

“Not quite. Remember that they’re only extending 60 day terms for the first $500K of purchases.”

“But that’s most of it. I don’t see the big deal here, Tom, really.”

“If you look at the cash flow forecast in Scenario One, you can see that we hit a negative cash flow by the end of October that exceeds $400K. That’s what I mean.”

“That’s impossible, Tom. If they’re extending special terms to us and our customers are paying us on the same basis, we should be good to go, even with only a 6 percent profit margin.”

“Remember, John, that when we hit the $500K cap on special purchases, the payment terms revert back to the supplier’s standard 30 days. That doesn’t seem like much, but it catches up to us in October, when we’ll owe our supplier $450,000. We won’t have collected that much in the entire campaign by then, and we’ll be paying the campaign expenses and sales commissions as we go along, plus the direct expenses we incur throughout the company. That’s not counting any provision for possible quality issues, product returns or bad debts.”

“The supplier cap does all of that?”

“When you cost it out, John, the supplier’s special terms cover only about the first 300,000 units. If we’re going to sell 500K units, that’s over 200K units that we will have to pay for on 30 day terms while we get paid on 60 day terms. The seasonality factors we’ve applied also ramp up the sales campaign quickly and when it all gets delivered in September and October, we get hit.”

“Just for fun, Tom, what happens if we sell the products evenly over the four-month period without any seasonality at all?”

“I’ve actually run those scenarios, John, which appear in the schedule on the alongside the base case. In every case where we flatten the sales curve, the cash flow significantly improves, in the case of the 500K unit programs, by about one-third. My guess is that it won’t be the same every month, but it does suggest that if we can accelerate the sales more quickly, we can minimize the negative cash flow when we hit the supplier’s cap on extended terms.”

 “I appreciate all of your work, Tom. It has provided a lot of insights. Let me go back and work on this a little more with our sales team and I’ll get back to you. We’ll review the balance sheet the next time we get together.”

(To see Tom Sampson’s schedule of the cash impact of Ace Business Stuff’s different campaign results, please visit www.exkalibur.com and select the category “North Bay Business Journal” in the category drop-down box on the left.)

•••

Lary Kirchenbauer is the president of Exkalibur Advisors Inc., providing practical business strategies for family and other privately owned businesses in the middle market. He works closely with senior executives and their businesses to accelerate their growth and improve personal and professional performance. Please visit his web site at www.exkalibur.com for supplemental materials related to this column and to learn about the CEO Round Table.