The Problem With Unplanned Growth

What happened? Unplanned cash-flow problems happened. The new, larger client had a slow process when it came to paying bills, so the jump in sales didn't mean an immediate jump in cash in the bank. Leslie and Terry were more concerned about delivering good service than delivering necessary paperwork, so their own invoicing process was slow.

They were owed about $85,000, but they couldn't go straight to their new client to get the money -- she said she'd already authorized payment and sent them to the company's finance department for answers. The people in the finance department were slow to respond and not particularly concerned about vendors getting paid quickly; their job was to pay slowly, but not so slowly as to get a bad credit rating.

Leslie and Terry had a bad case of "receivables starvation" -- money that was owed to them was already showing in sales and profits, but not in the bank. It would have been predictable, and preventable, with a good plan.

In this case, fortunately, the two partners had enough house equity to get a quick loan and pay their contractors. The business was saved and grew, but not without a great deal of stress and strain, and even second mortgages.

The worst moment is worth remembering: One of the partners' spouses was particularly eloquent about the irony of taking on a new mortgage while driving that "[profanity omitted] Mercedes."

The moral of the story: Always have a good cash-flow plan. Never get caught not knowing the impact of a sudden rush of new business. Get to the bank early, as soon as you know about new business, and start processing a credit line on receivables. And never lease a Mercedes until you're sure you won't have to take out a new mortgage a few weeks later.