Merck Business Insights

Growing Pains Part One – Outstanding Invoices

Growing Pains - Outstanding Invoices

Cash flow problems is one of the top reasons for business failure and it is not only small businesses that struggle. For many reasons big and small businesses find it hard to collect on outstanding invoices, manage inventory and costs. These issues in particular become tricky as businesses undergo change usually during growth and expansion. They don’t call them growing pains for nothing.

In this first part of three, we will look at the effect growing a business can have on outstanding invoices.

Before undertaking growth phases business owners need to be able to plan effectively for the changes and what effects those changes will have on their business financially. An increase in customers brings in more revenue but it also brings an increase in outstanding invoices to be collected.

I draw on an example from the days I worked in the Bank’s debt recovery (workout) division.

Case Study – Outstanding invoices

We had a very successful, growing business come in because of issues in keeping their overdraft within acceptable parameters. During our financial analysis we discovered that despite a growing revenue stream their debtor days had grown well beyond reasonable 30-45 days to 80, it took them almost three months to get paid for all their hard work.

When we asked them about it, they said ‘yes they had spoken to their financial controller about it and told him it was unacceptable and they would make sure they followed up with him’. Now that sounds reasonable but clearly there are deeper problems.

The first one: was they had used their overdraft to pay out a previous partner $300K, that now meant they had $300K of hard core debt sitting on their $500K overdraft facility. The misuse of the facility meant they had used the most expensive debt facility for a hard core debt and meant their limit was now no longer able to support their needs. Temporary limit increases had been granted in the past on the assumption that the strength of their growing revenue stream would eventually pay down their excess, but after 4 defaults the banker was forced to refer them to us in the debt work out division.

The second: was that they had a growing team consisting of a sales team of around 6 and a tech support team of around 10 all billing clients but only one person following up on invoices.

In our discussions with the business owners their tendency was to focus on their revenue growth ‘look at the strength of the pipeline!’ they would say, ‘we have x number of new clients signed up in the last three months alone!

Yes that is impressive and a strong and growing revenue stream is the goal of many businesses but it can mean nothing and in some cases ruin a business if this growth is not properly planned for as was the case here. These business owners were so focused on revenue growth that they had neglected to plan for the effects this revenue growth would have on the rest of their business and its operation, in particular invoice collection.

Growth can happen quickly and be very exciting. Many, particularly small businesses that suddenly find themselves tapped into a niche market can get lost in the speed with which things change. Financial planning for growth is often not considered or done very poorly as business owners tend to be reactive to growth and focus on the tangible and obvious needs such as staff, stock and client engagement. All of these are necessary but if there is no financial strategy prepared to underpin this growth then in many cases this success is short lived.

The moral is PLAN; if you want your business to grow financially then you need to financially plan for it.

P.S. the business used in the case study above did turn things around with our help and as far as I know are still trading successfully today.

If your business in planning for or undergoing growth please feel free to contact us at MERCK Business Consulting and find out if there is anything we can do to assist and ensure your growth is successful.


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