At Tom Vignali CPA, Inc., we frequently have the opportunity to meet with prospective clients to review issues of concern. Recently, an associate referred us to a prospective client to assess their financial needs. They were a relatively young company (under five years in business), very profitable, and growing exponentially. They had started out with no bank financing and had grown without ever taking out any bank debt. They had self-funded using a $30,000 line of credit on a personal credit card and had continued to use this form of financing during the past five years. They were extremely proud of the fact that they had no debt (other than the credit card), and were exceptionally proud of how fast they had grown their business.
Expansion outpaces funding resources
The initial problem identified was the fact that the $30,000 credit card line was no longer adequate enough to fund their purchases or A/R. The company found itself paying off the total credit card balance early so they could utilize the $30,000 line to make new purchases to support their expanding business. Sometimes, they found themselves paying off the total balance two or three times a month just so they could have the full $30,000 available to make new purchases to support new orders. Despite the fact that their A/R was net 20 and their A/P was usually net 30+, the collection of funds did not occur quickly enough for them to afford making the necessary purchases required for all of the new business. Even the extension of credit terms from their suppliers was not adequate enough to meet their current expanding purchasing needs.
The company was not willing to factor their A/R, claiming that the expense was more than they were willing to pay. The company was not willing to increase the credit limit on the personal credit card they were using, and was not willing to obtain a company credit card.
Needless to say, repeatedly paying off the existing credit card just to renew their line of credit was rather expensive, limited their purchasing power, and seriously impacted cash flow.
Working capital loan to the rescue?
After an initial review, it was determined that obtaining a longer term financial instrument in the form of a working capital loan would more than satisfy their purchasing needs and cash flow issues. Based upon the existing and projected exponential growth of the business, it was determined that a working capital loan of $175,000 – $200,000 would be adequate to meet their needs.
Following are a list of the loan calculations:
175K Loan 5 years 6% interest monthly payment: $3,383.24
175K Loan 10 years 6% interest monthly payment: $1,942.86
200K Loan 5 years 6% interest monthly payment: $3,866.56
200K Loan 10 years 6% interest monthly payment: $2,220.41
It is easy to note that the monthly payments required for any of these loans is far less than what the company is currently allocating from existing cash flow to fund their increased sales.
A local bank told the business that they would be more than willing to immediately extend a line of credit to them for a maximum amount of $65,000, but this would encumber all of the assets of the business (including A/R). It was determined that this would only address some short-term needs and would not address the level of growth and financial needs they were experiencing. In six months, they would be facing the same cash constraints and purchasing restrictions they were currently experiencing.
No time to change
Amazingly enough, the company decided that they were far too busy running their business and trying to meet the needs of an ever-increasing customer base to re-direct any of their valuable time towards working on the development of a funding strategy for their business. Despite the fact that the lack of adequate working capital was placing a stranglehold on their future ability to expand, the company decided to continue utilizing their personal credit card and possibly taking the $65,000 line of credit from the local bank. The underlying concept was that things had worked out well thus far, so why tinker with success? Besides, the company was far too busy to spend time on something they had never had to deal with before, namely having funding strategies to meet the needs of their growing business.
At Tom Vignali CPA, Inc., we always strive to provide prospective and existing clients with objective, comprehensive, and strategic plans to meet their financial needs. As a company grows, things change, most especially the funding strategies of the company. The funding mechanisms for a company doing $150K in sales are drastically different than the funding mechanisms required for a company doing $1.5MM. As revenues change, other things must change as well.
Expert advice, informed decisions
We always provide what we consider to be the best advice. But, the final decisions as to what to do are left to the clients/owners of the business. They are the ones who manage the short- and long-term activities of the business. And sometimes, owners really are too busy to change. If this is the case, we assist with modifications to address their short-term needs and time constraints, and hopefully the strategic plans become goals and objectives to work towards.
As every business grows and expands, so do its needs. Sometimes it takes time to change the strategies to meet the ever-changing needs of the business.
At Tom Vignali CPA, Inc., we assist our clients with issues such as this to identify what is necessary to perform a timely and accurate financial analysis of the company. If you would like to further discuss this process, don’t hesitate to contact us at Tom Vignali CPA, Inc.
Contact Us:
Thomas W. Vignali CPA Inc.
118 Point Judith Road
Narragansett, RI 02882
T: (401) 415-0798
tom@tomvignalicpa.com
www.tomvignalicpa.com
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