Case Study: Case of Branching Out

Many small press and digital printers are considering adding products and services to their sales mix or have done so as offset printing slides (see last month’s Case of the Changing Print Shop). I wrote about one such printer in my weekly email newsletter (sign up at www.crouser.com) who ran into an unexpected issue when he added embroidery: he ran out of cash. How come and what can be done about it? That’s the focus of this article and it isn’t just related to embroidery, either. Rather, it can be applied anytime we decide to expand.

Charlie said he added embroidery because he inherited the equipment and had the space. So, why not? Most of us would. Well, disregarding the technical issues of embroidering, he said his biggest failure was not to consider the amount of cash he’d need in expanding.

Say you sold widgets that cost you only $500 for $100,000 in sales. And say you had already lined up five sales. That’s $500,000 in sales on a $2,500 investment. Heck, who wouldn't jump at that? What you didn't consider, though, is customers would pay you at the rate of $1 a month for 100,000 months. Oops! Now you understand the basis of Charlie’s problem.

Know the Cost

There are cash flow models your accountant can help you with to project this cash requirement, but one simplistic way is consider that you will need at least one month’s additional sales in cash on hand to finance any project before you start.

Here’s why.

When we permanently add $10,000 to accounts receivable, we never get it back until we reduce our receivables permanently by $10,000, which is often when we close the business.

Huh? Don’t we get our money back when we get paid for the job? Well, yes, but it’s replaced with another receivable just as quickly. It’s like inventory. If you have five boxes of stuff, sell one and then restock the one box, the total amount of cash in inventory stays the same. You don’t really get your money back until you permanently reduce the inventory from five boxes to, say, three—then you get two boxes worth of cash back.

This phenomenon happens anytime we increase sales, which is what Charlie did by adding embroidery. If we increase sales from $1.5 million to $3.0 million; logically, the amount of credit we extended will double. At $1.5 million, we have $125,000 of average monthly sales. If all of our sales are credit sales (many printers approach this), then we’d have $125,000 of accounts receivable (30 days sales, assuming all pay at the 30 day mark). If, then, we double sales to $3 million and stay there, our accounts receivable would logically increase to $250,000—still 30 days of sales.

Accounting Explained

Where does the additional $125,000 of cash to finance the accounts receivable come from? From your cash, is where. While most of us try to bootleg this cash requirement, the practical effect is you will need an additional $125,000 of cash to finance your increased sales in this scenario. Ask Charlie.

So, when you are branching out, at least estimate your monthly sales and realize you need that amount of extra cash to finance the additional working capital requirements. And that does not include the cost of the equipment or other expansion expenses. Hope this helps.

Note: if you’ve added embroidery to your product mix and would like to participate in a no-cost or obligation study group, message me at tom@crouser.com. You can participate in any or all of my surveys. Go to http://crouser.com/panel/ and sign up. Participants in a survey receive a full copy of the findings without cost.

Tom Crouser is principal of Crouser & Associates, Inc., 4710 Chimney Drive, Charleston, WV 25302; call 304-965-7100 or visit www.myprintresource.com/10004688. He works with businesses undergoing transition and welcomes your inquiries. Message him at tom@crouser.com and follow all of his posts at www.tomcrouser.com or www.myprintresource.com/blogs.