Don’t Become the Next Ponzi Scheme

There is a kitchen cabinet company that would contract with the home owner and design a kitchen. Once the design was approved and a deposit was paid, the kitchen cabinet company would then work with a wholesale manufacturer to create the cabinets. The homeowner pays a deposit after they approve the design and then the balance once the cabinets are installed by the general contractor.

The kitchen cabinet company was having major cash flow issues. The profit they were making on their jobs was not sufficient to cover the monthly overhead of the business. This was due in large part to weak sales.

When a home owner would pay the initial deposit, the kitchen cabinet company was then supposed to pay a portion of the deposit to the manufacturer. Typically the kitchen cabinet company would layer on a profit on top of what was required by the manufacturer. The excess amount was used to cover the kitchen cabinet company’s overhead, etc.

Since the kitchen cabinet company was strapped for cash, they began using the whole deposit amount to cover overhead and would convince the manufacturer to work without the deposit. Then, when the kitchen was finished, they would use the final balance paid by the home owner to pay the manufacturer. However, as the cash position became more and more challenging, the kitchen cabinet company did not have the funds to pay the manufacturer and would wait until they signed another contract with a home owner and received that deposit to pay off the previous one.

Needless to say, the kitchen cabinet company was in a bad state. Then, sales slowed down and they did not get the next deposit. The manufacturer refused to deliver the kitchen. The home owner was left fully paid without a kitchen to show for it.

Business owners many times do not intend to become engulfed in a mess where funds were misappropriated and they have dug such a deep hole that it is nearly impossible to recover.        

Typically, the business owners justify it as a once time occurrence, but then it snowballs.

There are those who are truly crooks as well, but I choose to believe that is not the majority.

Here are some best practices which can be implemented to put a company in a position to succeed even when cash flow gets tough:

•      Get access to the largest line of credit your company is eligible for. I’ve literally seen this save businesses. When your business is in trouble, it is much harder to get approved for a loan

•      Be on top of your receivables and mindful of paying your vendors

•      Try to negotiate lenient payment terms with vendors. When you cannot pay, speak to the vendors and try to create a mutually acceptable plan

•      Plan ahead on what expenses you can cut if necessary. This is most often in your payroll.

•      Have ethical lines you refuse to cross no matter what such as items that are illegal, theft, fraud, etc. If you find yourself trying to rationalize breaking your rules, speak to a friend/mentor you trust and who will be real with you

•      Establish a line for when you won’t borrow anymore and need to close or unwind your business. It is hard to be objective when you are in the thick of things. Use someone objective when in a pinch.

Ultimately, an independent fractional CFO is a powerful tool to guide you through some of these difficult items to navigate!