By Mike Williams

It is one of the most frustrating realities of business, that after all your efforts and hard-fought battles to gain new business, you have run out of cash.

If you have been in business long, or if you are the one who started the company, you have almost certainly have had times when cash was tight and you scrambled to pay vendors, suppliers, your landlord, or your employees. Even if you’ve been fortunate enough to operate a cash-rich business, you will experience a drain on cash as revenues go up.

How can this be? Increasing revenues is good. We could all use more sales, even if we’re at full capacity. “Give me more problems like that,” you’ve probably thought.

Cash flow gets strained by increasing sales, probably more than by any other circumstance. Here is why:

When you take an order from a customer, you immediately start incurring costs to fill that order. If there are raw materials to purchase, equipment to fire up, subcontractors to hire, or service work to be done, these you start doing right away. If you have salespeople creating these orders, you probably have commissions to pay. These bills mount quickly, and you don’t mind racking them up if sales continue to increase. You’re looking forward to a great month, quarter, year.

In most businesses, these bills will come due before you receive payment from your customer. If you’re in the retail or restaurant business you may be thinking this doesn’t describe your situation, but you’re not immune from this for reasons I’ll address shortly. For the rest of you this will ring true: some or all of your suppliers and hires, whether they are employees or contract help, will need to be paid before the customer’s payment hits your bank account. And if sales continue to rise, the payments you receive from last month’s customers won’t cover this month’s new expenses. The problem compounds, the longer sales keep going up.

This problem can get better through changes to your payment terms, getting some percentage from your customers up-front, and extending your payment terms to whatever vendors you can. This can be tough to do with employees, though, and I wouldn’t recommend delaying commission payments to salespeople. The closer you can get from the sale to the reward, the harder your salespeople will work for you.

The problem is more likely to get worse, however. Increasing sales usually means a crop of new customers. Some of these will be slow payers, and many will test you to see how far they can get away with paying after the due date. Most of my clients experience an increase in the average age of receivables when sales increase, even if we take reasonable measures to try to collect faster. No one wants to alienate the new customer.

Now that quick word to retailers and restaurants, and other businesses who enjoy payment-on-delivery, or even before delivery. Most of you have had to purchase inventory ahead of when you sell it, so you might think you’re already over the cash flow hump. But think about your own behavior as sales increase. If you have two months in a row of climbing sales, aren’t you likely to increase your orders to suppliers for next month? Don’t you consider hiring extra staff, because the memory of a full store with not enough help is still fresh in your mind? We all believe, or at least hope, that our two good months are the start of a trend and not just a freak occurrence.

So what must be done? Certainly do all you can to shorten your receivables and lengthen your payables cycles, if you haven’t already. More on how to shorten your receivables in a future post. But there is no way around the need for sources of short-term cash, and for that you need your banker.

The old joke is, “Banks only lend to people who don’t need it.” Well lucky you, you are now one of those who “don’t need it.” Sales and profits will be up. The only problem is a temporary shortfall in cash. Maybe not so temporary if the economic recovery continues and sales keep rising, but these are more good problems.

Getting a Working Capital Line Of Credit is becoming easier. You just have to comply with what your banker needs in terms of Income Statements showing the improving sales, Balance Sheets to show what debt and obligations you already have, and Cash Flow Statements to demonstrate how much cash you’ll need, when you’ll need it, and how you’ll be able to pay it back. A Line Of Credit is usually preferable to a straight loan because you can access it when you need, you only incur interest expense on what you use, and they are often easier for the bank to approve than a loan. If you expect increasing sales, get your Line in place as soon as possible.

So take that sales order, do that extra deal, and improve your top line without fear of the hit to your Cash Flow.

Oak Hill Business Partners is a professional services firm serving small and mid-sized businesses.  Oak Hill provides Growth Management Services, Mergers & Acquisitions Support, and Turnaround Solutions.  We help entrepreneurs and business leaders win based on their business ideas instead of all the other things that get in the way.

Mike Williams is a Partner with Oak Hill Business Partners specializing in sales and operations.  He has more than 20 years of experience working with businesses in many different industries.  His background includes sales, sales management, operations, and entrepreneurship.