Tweet

Business is Great! But Why are we broke?!

Guest post by: Stan Prokop

Article Overview: The articles provides an insight as to how working capital defiicencies can cripple a company in spite of solid revenue and profit growth .

Business is Great! But Why are we broke?!

We would probably all agree that a business owner and financial manager can be forgiven for wondering why a company whose business is ' great ' could be a candidate for failure . LET's assume our last comment related to 'Sales '. We could however say the same for profit.

The answer is of course, it's the 'lack of cash; as a business grows it uses more and more cash to hold accounts receivable and inventory. Yes, the company has a line of credit with the bank, but what happens when business owners find themselves up against the top of the line on a continuing basis. Bankers like it when a line of credit fluctuates - being at the top of the line all the time without those fluctuations portends a problem.

There is a top notch business case in the United States that illustrates our articles theme. The case involved a department store in the 1960's called the W.T. Grant Company. The basics of the story are as follows, and it's a classic case to illustrate out point.

What makes the Grant story more compelling is that the company literally helped to change the laws around financial reporting. Up to the time most companies simply produced a balance sheet and income statement. When the balance sheet had a lot of assets, which were growing, and the income statement had a lot of profit, well, what could possibly be the problem? Banks continued to lend to Grant on an increasing basis, and Grant started to lend to its customers for purchases on credit. Sounds good, right? Except for the fact that Grant ultimately filed for bankruptcy. As accountants, lenders and investors started analyzing the company more closely it turned out there were lots of assets and profit, just no cash. The company had actually been burning cash, as the expression goes, for ten years. It was a textbook case of no working capital or the controls to recognize it. All those receivables and inventory were in very poor shape, receivables uncollectible, inventory un - sellable.

Although all investors and lenders still look at the bottom line profit, as much focus today is placed on cash flow. That's because cash flow is directly linked to overall profitability.

Typical signs of a business going down this path are:

-expansion and growing seem evermore difficult

-every situation seems to be a crisis

-management has no handle on the real financials

As the majority of businesses are financing by banking arrangements the company also starts missing loan payments with pressure from other creditors and suppliers not far off.

At this point assets are no longer growing; they are at risk of shrinking. Sales slow down, and money seems to be leaving the business, not coming into the business.

In summary, businesses need to focus on working capital, as much so in times of growth as times of a downturn. Business owners tend to rationalize the working capital problems by blaming the economy, a competitor, the dollar currency, etc. Blame is an easy way out, the solid business owner recognizes the fixes required, looks at internal matters such as financials and working capital, and exerts change in processes and controls. Losses won't necessarily put a business under, but we are assured lack of cash will.

Businesses with solid working capital and financial possibilities survive in bad times also!

Related Articles
  Your Actions Always Tell The Truth
  Doesn't everyone want to be rich?
  Dealing with Difficult Customers #2
  Article # 32 Sick And Tired Of Being Sick And Tired And Broke?
  Top Mlm Leaders-Are You One Of Them?
  Coach Pete's: Tip You Are Already Rich
  Your Future
  Business Presenting for Leaders - Break The Rules
  Just Over Broke - A Better Option for Young Entrepreneurs
  10 thing I wish I learned before 40
  An Alternative solution to the problems of MLM Business
  If You Don't Like Where Your Parents Were At Your Age - Do Things Differently
  The Secret to Achieving Success in Any Business
  Frankie Valli and Jersey Boys Good Metaphor for Recession Worn Companies
  Are you providing what people want or are you trying to provide what you think people need?
  2 Signs Your Business Is Going Broke And Your Solutions For Fixing Business Cash Flow Problems
  Are You Kissing Frogs Or Making Sales?
  The Unsolved Mystery In Sales
  If you work for Money, You will settle for less
  Store Layout

Article Tags: working capital



Related Forum Posts
My entry - 1. The Best Business Books Ever: The 100 Most Influential Business Books You'll Never Have Time to Read - this is a fascinating book about the history of Business theory, and I'd recommend it to anybody. 2. The Big Book of Small Business: You Don't Have to Run Your Business by the Seat of Your Pants, by Tom Gegax. Ditto. 3. PADI: The Business of Diving Book Okay, so this book won't be of use to anyone who doesn't want to start a scuba store, but I did, and this book was of course invaluable to me in reaching that goal.
Chacha search engine - Great suggestion Andy! I read about ChaCha in Inc or Business 2.0 a few months ago. They have an interesting story - I wonder how they are going to scale as they grow if they have to pay their guides. Have you had any experience using ChaCha?
Finding creativity - Great topic Andy! For me it's: - Going for a walk (I always try to get out at least once during the day) - Taking a shower - Reading business magazines (especially Inc and Business 2.0) - Late at night (I'm more productive / creative at night than during the day) - Relaxing with a drink at the bookstore
Re: How To Stay Motivated In Your Business - Business does not happen over night. Be patient and persistent, with the right mind set and short term and long term goals you will be successful. Keep your eyes on the prize and don't let anything get in your way. Great post, thanks Evan. Dallas.
Re: WHAT BRINGS TEARS TO YOUR EYES ???? - July 18,2009 12am My loved one broke up with me


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Word of Mouth Marketing Tips Fuel Success

Email Marketing Made Easy #11 - Avoiding Spam

Ask All to Buy!

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.