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Cash Flow is King: Managing Cash Flow in a Growth Economy

July 24, 2017

Steve Albart, Enterprise Bank & Trust

What is the primary reason that profitable companies fail? CASH FLOW. Or, the lack of cash flow to be precise.

Profitable companies can go out of business because they simply run out of cash to pay bills. High growth in short periods of time can put a tremendous amount of strain on your cash flow.

It all starts with a company’s capital position, known as the net worth of the company. For a car to go fast, it starts with fuel in the gas tank to drive the engine. The capital base (net worth) of the company is the equivalent of fuel for a car to your business. A company needs “fuel” to grow, the faster the growth the more fuel the company needs.

Do you have enough capital in your business to sustain high growth?

Your debt-to-net-worth ratio is a good gauge of the strength of your company’s capital base. The lower the ratio, the greater the ability a company has to grow. Inversely, the higher the ratio, the lower the ability company has to grow in a good way.

What is a debt-to-net-worth ratio?

Your debt-to-net-worth ratio is a gauge of the overall financial health of you or your company. Your net worth is determined by the total of your assets, minus the total of your debts. Your assets include home equity, your possessions, CDs, investment accounts, cash, and any other financial assets. Your debt total includes your mortgage balance, loans, and credit card debt. A company with $100,000 in debt and $200,000 in net worth has a 50% debt-to-net-worth, or a 1:2 ratio. The lower your percentage/ratio, the better – for you and your lender.

Understanding the day-to-day cash flow of your business in a growth economy is critical to the future viability of the company. Just because a business is working on profitable jobs, it doesn’t ensure success. An increase in jobs (revenue) means an increase in outlay of cash for more employees, more overhead, inventory and expenses. It may take 90 to 150 days to collect the revenue after the increased outlay of cash.

Do you have access to cash to cover five-months’ worth of expenditures before collecting any receivables?

Cash Flow Red Flags

  • The company has the largest backlog in history
  • You have just won the largest job in history
  • The company line of credit balance does not revolve
  • The debt-to-worth ratio is in excess of 4 to 1
  • Revenue of the company are expected to double / triple this year

For much more about cash flow red flags - and how to overcome them - request our "18 Red Flags That Can Put Your Business Loan at Risk" report.

Budget and Forecast First

The absolute best way to avoid running into a cash crunch is establishing good cash flow forecasting and budgeting practices. All companies from all industries can budget and cash flow forecast no matter the level of uncertainty. This practice is more imperative in growth economies than shrinking economies.

A budget is different than a cash flow forecast. A budget is a tool for you to manage overhead and profitability expectations against actual performance on a weekly, monthly, year-to-date and annual basis.

A cash flow forecast will simply state: the company has XX dollars Monday morning. It will collect YY receivables and pay ZZ bills this week and the cash balance Friday night will be XX dollars. Depending on your business, the cash flow forecast can be daily, weekly and/or multiple months.

Does your business have the financial expertise in-house to handle budgeting, forecasting and analysis?

The health and future of your business is on the line. If you don’t have the expertise, there are plenty of resources out there to help you. A good place to look is your team of professional advisers: your banker, CPA, attorney, or bonding agent.

Remember, all growth is not good growth. Be strategic with your growth. When you approach a growth opportunity, remember to ask yourself these questions:

  • Do you have enough capital in your business to sustain high growth?
  • Do you have access to cash to cover five-months’ worth of expenditures before collecting any receivables?
  • Does your business have the financial expertise in-house to handle budgeting, forecasting and analysis?
  • Can the company generate the same amount of gross revenue at higher margin?
  • Will doubling the size of your company generate the same amount of gross revenue at a higher margin?

It’s critical that you understand your company’s cash flow and capital position in a strengthening economy with strong backlogs – the future if your company depends on it!


Enterprise Bank & Trust does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisers before engaging in any transaction.


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