Here we must do a little math calculation together to make a point.\u00a0 Assume that your gross margin from sales is 50% for ease in calculation.\u00a0 Assume 30 days to collect receivables from completed work, and 30 days to complete the work.\u00a0 Finally, assume a fixed overhead equal to all of the remaining 50% of revenues, just for the sake of making this point.\u00a0 Zero profit. Now consider an increase in your revenues from $1 million a month to $1.5 million, the extra $500 thousand to be billed in 30 days upon completion of work.<\/p>\n
During the first 30 days, you pay out over that period $750 thousand, the fixed overhead and cost of sales.\u00a0 That\u2019s $250 thousand more than last month, putting you in the hole.\u00a0 You bill the $1.5 million on the 30th <\/sup>day and start the clock, waiting 30 days for receipt of the cash.\u00a0 During that time you receive the $1 million you billed the month before but pay out another $750 thousand in overhead for the following month.\u00a0 Where do you sit at the moment before collecting the $1.5 million billed last month?\u00a0 You are down an extra $500 thousand beyond the breakeven amount when you were billing a steady $1 million a month and paying out 50% for cost of sales and 50% for pre-ramp overhead.<\/p>\n [Email readers continue here…] <\/em><\/span>It took your company finding or funding $250 thousand a month for two months to finance an increase of $500 thousand in revenues.\u00a0 Surprised?\u00a0 Most managers are.\u00a0 If the growth continues, the amounts needed just increase and increase, until fixed overhead is no longer such a large part of revenues (growing more slowly than revenues), and perhaps margins increase with buying power and efficiencies of mass production.<\/p>\n With an asset-based bank line and a limit far higher than current need, a company can borrow against those receivables and eliminate at least the second $250 thousand of cash needs, since the receivable \u201cpledged\u201d for the bank line increases by $500 thousand.\u00a0 Most companies have little headroom in their asset-based bank lines, and such expansion of revenues can be accommodated only for awhile before the line is borrowed to its maximum.<\/p>\n Growth requires its own unique form of working capital cash planning.\u00a0 The mere fact of rapid growth is not enough to create capital within most organizations until the growth becomes more stable and receivables collections catch up with costs advanced to the various resources to \u201cbuy\u201d that growth.<\/p>\n","protected":false},"excerpt":{"rendered":" Here we must do a little math calculation together to make a point.\u00a0 Assume that your gross margin from sales is 50% for ease in calculation.\u00a0 Assume 30 days to collect receivables from completed work, and 30 days to complete … Continue reading