Money-Managing Needs Change With Growth

Money is not only the mother’s milk of politics, as the late state Treasurer Jesse M. Unruh once said, it is the lifeblood of small business. And while every company has its own needs and characteristics, there are some rules of thumb for money management that most follow. Kevin Sayer, a manager at the Newport Beach office of the accounting firm of Ernst & Whinney, and Ralph Sabin, a partner with the firm as well as head of its emerging-business practice, recently outlined for The Times the three basic stages of a company’s growth--and suggested the goals that a company’s treasurer should aim for in managing the finances through each stage.

PHASE ONE: EARLY DEVELOPMENT

In the early development stage, spend money on product development and marketing and distribution. Keep administrative costs at a minimum. Production costs will be high and profit margins slim because volume is low. The goal: operate lean and don’t lose too much money.

Assets Property, Plant and Equipment 25%

Cash 15%

Accounts

Receivable 25%

Inventory 35%

Liabilities & Equity

Equity 40%

Long-Term

Financing 10%

Accounts Payable and Accrued Expenses 50%

CHARACTERISTICS:

Cash is a big slice of the pie at this stage because a hefty reserve is needed to cover the unexpected.

Inventory is mainly raw materials. Not enough sales to have a large stock of finished goods.

Don’t make a substantial investment in facilities at this stage. Lease a small building and minimum equipment.

Accounts payable is the biggest liability because equity and debt financing is still difficult to obtain. Negotiate good terms with vendors.

To minimize cash flow, lease equipment.

Equity will tend to consist of personal funds, including loans and retained earnings.

PHASE TWO: GROWTH

Sales should be increasing, and efforts should be aimed at exploiting the market. Keep product development costs at about the same percentage as in development stage. Personnel increases will be required, but keep it under control. For most firms, office and management systems for record-keeping, information processing and inventory control won’t keep pace with growth. Cash shortages are common, so good bookkeeping is critical. If new facilities are necessary, don’t go overboard. It is cheaper to move again than to pay for unused space.

Assets Property, Plant and Equipment 20%

Cash 5%

Accounts

Receivable 35%

Inventory 35%

Other Assets 5%

Liabilities & Equity

Equity 35%

Short-Term Financing 15%

Long-Term

Financing 15%

Accounts Payable and Accrued Expenses 35%

CHARACTERISTICS:

Cash is tight during growth. Reserves are almost gone.

Accounts receivable grow because emphasis is on sales rather than on cash collection.

Inventory is a combination of raw material and work in progress. Stay alert to avoid accumulating obsolete material.

Most funds are left in the business, not withdrawn by owner.

Banks are more willing to extend credit lines, collateralized by accounts receivable and inventory.

Vendors continue to help finance growth with extended credit terms.

PHASE THREE: PROFITABILITY AND MATURITY

The focus is now on profits rather than sales. Financial arrangements with banks and vendors should be improved. Management systems should be brought up to date. Tax planning becomes increasingly important. This is the time to start a program to reward key employees who contributed to the firm’s success. It will become necessary to decide whether to push for more expansion, to maintain the status quo or to sell the business and take profits.

Assets Property, Plant and Equipment 25%

Cash 15%

Accounts

Receivable 30%

Inventory 30%

Liabilities & Equity

Equity 45%

Long-Term Financing 15%

Short-Term Financing 20%

Accounts Payable and Accrued

Expenses 20%

CHARACTERISTICS:

Cash reserves increase because of retained profits.

Receivables and inventory are less significant because management systems have improved and the customer base has stabilized.

Inventory is primarily mainly finished goods.

Property, plant and equipment costs remain the same, most equipment is purchased rather than leased.

Vendors extend favorable credit terms because bank credit can be used to take advantage of vendor discounts for early payment.

Personal funds can be drawn out of the company, replaced by equity from outside investors. Depending on tax strategy, cash flow can be distributed through dividends, bonuses or salary increases.

Source: Ernst & Whinney Emerging Business Group, Newport Beach