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Cash Flow Mishaps: Stories from BAM Practitioners

We asked BAM practitioners to share their insights about cash flow. Here are 6 mini-stories of BAMer ‘cash flow mishaps’ or near misses!

[Read Part 1: 10 Cash Flow Tips and 10 Red Flags from BAM Practitioners]

6 Cash Flow Stories

One cash flow mishap we’ve experienced is significantly underestimating cash needs to service a period of significant growth. This can happen when long lead time raw materials are needed, with up-front payment. It can also happen when financing growth requires organisational learning and capacity building, it then takes extra time to ramp up production, and the working capital cycle is longer than expected. Another real danger is when a series of smaller mishaps all happen at the same time, for instance low quality raw materials, late delivery of materials, late payment by customers for finished products. Each of these on their own are manageable, but create a serious issue when stacked together. We have been able to develop some cashflow forecasting tools using MS Excel which give us visibility on future cash needs, including graphs, which feed into weekly reporting. This has been invaluable to us. – MH, Manufacturing, Asia

 

A few years ago I led a new initiative at our company to build a software product for retail banking. I was hoping that the recurring revenue from product sales would offset the erratic cash flows that are typical of a project-based software company. A project team of eight members spent 18 months building the product and we spent another year having a sales team sell the product. For a small company like ours the outflow of funds in this experiment resulted in a major blow to our cash flow for a couple of years. What I learned from this costly mistake is that a project oriented service company is not automatically good at being a product sales company. They are two different types of organizations with different team structures and competencies. – Joseph, IT, India/USA

 

We had a single customer buying containers of giftware at about $50,000 each. We built up a second factory 6 hours out in the countryside around this single customer. Things went well for about 7 years. Our policy was to require a 50% deposit and final payment 30 days after shipment. When this customer started having problems in the US market we were not aware. They placed orders for three containers very close together and our finance manager lost track of which deposits were collected and ended up shipping out all the containers within the 30 day terms period. Then the customer declared voluntary bankruptcy while owing us over $140,000 which we never collected. – Bill, Manufacturing, China

 

One thing we are experiencing lately – and we need to raise capital for in order to avoid a cash flow mishap – is that the business is growing and we are closing sales faster and bigger than ever. We just looked at our receivables and I was shocked how big they are, not because our customers aren’t paying on time but just the reality of needing more working capital than we did a year or two ago. The idea that the sales success and momentum we’ve been praying for could be the very thing that puts us in financial stress was a good reminder of the need to plan the appropriate amount of working capital and continue to be aggressive with negotiating payment terms (to get as much upfront as possible and push for Net 30 days over Net 60 days). – M., IT, Asia

 

I think monitoring your cash flow and budget is the third most important activity of a faith venture entrepreneur, right behind seeking God’s direction for the business and marketing the business. It’s third, because you want to serve God and not money and marketing is the lifeblood of any venture. But cash flow is very important because I’ve witnessed numerous practitioners err in this area by taking their eye off of this important indicator of how the venture is doing. Five years ago, during the startup of our custom cabinet business that employs ex-offenders, we made a mistake by growing too fast because of some positive publicity on a local news station and by including installation and finishing into our business model. We took a large amount of 50% down payments on jobs to pay for the wood but then proceeded to anger customers with poor quality and installation work because we were attempting too many jobs at the same time. The situation quickly deteriorated with us having costs far in excess of what we were billing for the jobs as well as having to refund some customers. I had been closely monitoring our cash flow through this process but one day things went really bad and we ran out of money for payroll. I found myself praying to God for provision to overcome our mistakes, as well as wisdom for the future. That day, a check arrived in the mail from an anonymous donor that covered our immediate money needs, allowing us to pay employees, satisfy our customers and change our business model. We stopped installing cabinets and started focusing on building just one line of unfinished shaker style cabinets. And we carefully managed our growth to ensure we could deliver a high-quality product. Five year later, business is going strong because of God’s grace. – James Reiner, Belay Enterprises, USA

 

After the Asian tsunami in Aceh, seven organizations partnered together to get UN relief and development money to do construction projects. We all received a letter from the UN saying that we would have the money in less than 10 days and then they proceeded to put lot of pressure on us to move quickly. The UN people met with me almost daily and aggressively pushed me to get my company going faster, to hire people quickly etc.. Time went by and they kept pushing and pushing but we saw no money at all. Then the UN people slowly began to back off. After going through many hundreds of thousands of dollars of our money, I was forced to abandon parts of the program and began laying people off. It was a very hard, heartbreaking experience. A year and a half later, all seven organisations ended up filing a lawsuit against the UN and they settled out of court. The first money I saw from the UN for this program was 19 months after I received that letter guaranteeing payment within 10 days! One of the six other organizations involved in this with me was Habitat for Humanity (HFH) and they also ended up with huge problems and debt over this situation. They built homes with the promised cash and people had been living in the homes for a year and a half before the UN paid them their money. I learned never to trust governments, government offices or government money. There are always multiple delays and multiple layers of bureaucracy! Never start something – even with UN guarantees – until the money is in the bank. My Board of Advisors was a tremendous lifesaver for me in this situation, I would have sunk without their help. – James, Construction and Service Industries, Indonesia

 

Compiled by Jo Plummer, with thanks to the BAM practitioners that contributed stories.

Don’t miss Part 1: 10 Cash Flow Tips and 10 Red Flags from BAM Practitioners

 

Jo Plummer Jo Plummer is the Co-Chair of the BAM Global Think Tank and co-editor the Lausanne Occasional Paper on Business as Mission. She has been developing resources for BAM since 2001 and currently serves as Editor of the Business as Mission website.

 

 

Join us for our Business Planning Part 3 series on The BAM Review Blog, looking at financial planning and people planning. Have your say on social media on this topic by following us on Twitter or Facebook.

 

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