There’s a lot to keep track of when you have a growing small business, and managing cash flow can be tricky. Bill D’Alessandro is back this week to help us shed some light on different cash flow issues and how to handle them.

Bill and Andrew have had their own problems with cash flow in the past, so today they share those lessons. They talk about why you might be strapped for cash even if your revenue is booming, legitimate reasons for having cash flow issues, and the best ways for small businesses to raise more funds.   

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(With your hosts Andrew Youderian and eCommerceFuel.com and Bill D’Alessandro of RebelCEO.com)

Andrew: Welcome to the eCommerceFuel podcast, the show dedicated to helping high six and seven-figure entrepreneurs build amazing online companies and incredible lives. I’m your host and fellow e-commerce entrepreneur, Andrew Youderian.

Hey, guys, it’s Andrew here, and welcome to the eCommerceFuel podcast. Thank you so much for tuning in today. Today, we’re gonna be talking about cold, hard cash. How do you manage cash flow in a growing business? And we touched on cash flow in our episode about accounting, the one riddled with gunshots and explosions, which we’ll link up to in the show notes if you haven’t listened to it. But what I wanted to talk about, a little bit more about cash flow. What are legitimate reasons for having cash flow problems? What are bad reasons for having cash flow problems that are kind of indicative of systemic problems in your business and some options for smoothing those out? And joining me to talk about it is Mr. Bill D’Alessandro. Bill, how are you doing, buddy?

Bill: Doing well. Nice to be back for sort of part two on cash flow and accounting.

Andrew: Yeah. If we have any listeners left after our accounting episode. Hopefully, they’ll stay with us for this one. I guess this is not super sexy stuff, right? But it’s pretty important.

Bill: It depends on your definition of sexy, I suppose. But I think this is pretty fascinating stuff, and if you have an e-commerce business or any business, really, that’s growing, you are probably going to be riveted by this conversation.

Bill’s Cash Crunch Tale

Andrew: I wanted to maybe kick things off, talk about how important this is and if you don’t manage it well, some of the situations, it can put you…and, Bill, would you mind…you kind of had a story where you had a cash crunch in the last year or two. Would you mind maybe kicking things off with the story of what happened and kind of the stress that put on you?

Bill: Yeah, it was brutal. So this was a little over a year ago. This is probably early 2015 and I had just done an acquisition, our core business was growing, the business I acquired was growing. And it seems crazy to say, I hadn’t really learned the lesson of cash flow management at the time because if you have a business that’s growing, I mean, imagine…growing soaks up cash, right? Your business doubles, your inventory is going to double, and that means that’s that much inventory you have to buy, that’s cash out the door, and we’ll get into that more later. But basically, I outgrew my cash, and I realized that I was gonna run out of money, and I didn’t have a good line of credit lined up, and I actually had to make a spreadsheet where I made daily cash flow projections. So I projected, I had dates across the top. Days, not months.

I had days across the top, and then I had all of the sources of cash, like, you know, sales from my website, then when was Amazon gonna pay me, when were a couple of wholesale customers gonna pay me, and then when where all my bills coming. And I knew what days they had to sit on, you know, when do I have to pay my Pay-Per-Link agency, when do I have to pay all sorts of stuff. And I mapped it out by the day. And I think I was down, at one point, to under $1000 in the business checking account, you know, the closest to the trees I was flying on one day. I won’t make it without running out of cash.

And I projected it and I pushed some bills out if I had to because it let me see, like, “Wow, on this day, by my projection, I have negative $5,000 in my bank account. I need to push out this bill, you know, beyond that day.” So that was about probably two months before I was able to get it under control, and it was because it was kind of pre-summer, and for people that follow know that I sell a lot of sunscreen, so we were gearing up in inventory, and so we just got a cash crunch.

It wasn’t that the business wasn’t profitable, it wasn’t that business wasn’t growing, which is why it kind of threw me for such a loop and came out of nowhere. If you don’t pay attention to it, you can really get burned. So it could happen to anybody, and to have a cash crunch does not necessarily mean you’re having a business…I mean, it’s a business issue, but it doesn’t necessarily mean there’s something structurally wrong with your business. It could just be that you’re growing too fast. So don’t think that if you’re having a cash crunch it means you’re doing something wrong. Or don’t think that if your business is growing you’re not gonna have a cash crunch.

Slowing Your Growth

Andrew: Maybe we can dive into legitimate reasons for having cash flow problems because there are definitely are some, and there’s definitely reasons where if you have cash flow problems for those reasons, you have a big problem. So inventory growth, the one you touched on, probably one of the biggest reasons growing companies have this issue, especially like in Amazon with so many people blowing up Amazon businesses. The more they grow, it just sucks cash up. That is a legitimate reason, but how do you, apart from financing, which we’re gonna talk about, that some of the financing you can use for short-term loans to bridge some of these cash flow issues, how do you deal with that? You can slow down growth, of course, you can kind of grow just organically, but then that limits how quickly you’re able to grow. Apart from financing and slowing your growth, are there any other ways to, you know, address that?

Bill: Unfortunately, slowing your growth is almost one of the only options. The other way you can possibly help yourself is if you’re growing so fast that it’s soaking up inventory, and maybe it’s worth an illustration of why growing fast sucks up inventory. If you have $1 million in sales and $200,000 of inventory, which is fairly standard. You turn your inventory five times a year, so you have one-fifth of revenue and inventory. You probably also have, say, 20% margin, so you probably make $200,000 a year, and you’ve got $200,000 inventory.

Well, if you go from $1 million in sales to $2 million in sales, your inventory has got to go from $200,000 to $400,000, and that’s an additional $200,000 of cash that is sucked up by that growth, but that was your entire debt income last year. So you’re gonna look at your revenue and go, “I’ve doubled,” and you’ll look at your bank balance and go, “It hasn’t grown a dime, what the heck is going on?” And that’s what’s going on, is that it’s all going into inventory. So if you’re having this problem, one of the best non-bank places you can look is to your suppliers and see if you can get trade terms from your suppliers. Go to them and say, “Hey, look. I’m a good customer, I need 30 days to pay. I need 60 days to pay.”

I think you might have trouble pushing them off much longer than 60 days, but a lot of suppliers will give you net 30 without even blinking, and some will give you, you know, say, 50% down, net 60 if you push them, and that’s interest-free. I mean, that’s…you should be…everybody should be asking all of their suppliers returns, even if you’re not in a cash crunch because it will help alleviate a potential cash crunch. I can’t tell you I have net 30 or 60-day terms with a couple of my suppliers now, or most of my suppliers now, and it’s a lifesaver a lot of times. And then, of course, though, the holy grail would be tab what’s called a negative cash conversion cycle, which is where you’re able to sell the stuff before you have to pay the people you bought it from.

Andrew: It’s called drop-shipping.

Bill: It’s called drop-shipping. Exactly. That’s right. You know all about that.

Managing Accounts Receivable

Andrew: What about the…another potential legitimate reason to have cash flow problems is on the accounts receivable side, and it’s kind of on the inventory. It’s similar, but let’s say you’ve got, you know, you ship out stuff to people and they gotta pay you, and you’re the one extending the terms to them, either from an e-commerce perspective, or maybe even a consulting perspective, or something like that. So a lot of times, like I was chatting with a good friend of mine who is getting ready to launch a business, and this was a huge deal for him because a lot of times he doesn’t get paid until…sometimes like 90, 120 days after t