|Operating Without a Plan and Cash flow - An
A relative dies and leaves you a $45,000 inheritance.
You have about $115,000 clear equity in your family home,
according to a recent appraisal. You've always had an itch to
be your own boss and operate your own retail sport fishing
You pay a business student to make up a
simple business plan with cash flow projections to satisfy
the bankeršs request and on that basis the bank
approves a $40,000 five-year demand loan.
secure it with a second
mortgage on the equity in your home. This loan will
require a payment of approximately $900 monthly to service
You sign a 5 year lease on a 1500 sq. ft.
store location two blocks off the main shopping artery at
about $1900. rent per month. You find by the time you
completed the signage, furnishing your office, buying a
van and the leasehold improvements,
the inheritance money is spent.
You excitedly attended the sport fishing
tradeshow in Los Angeles and committed to purchases of
seven lines of electric boat motors, all the popular
brands of downriggers, the entire product lines of
Mitchell-Garcia, Daiwa and Zebco automatic baitcasting and
spinning reels, a large assortment of freshwater,
saltwater and flyfishing graphite rods, and countless
lures, lines and accessories. The big suppliers have all
been encouraging and suggested you may qualify for
30 day credit terms within
the year but for now it's C.O.D. You are committed to almost $55,000
You haven't given the banker a second
thought since you got the loan, or even glanced at the
business plan you submitted. It's served its purpose, so
you think. Your store finally looks presentable and its
only taken you a month longer to get it up and running
than you had anticipated. Of course not all the stock has
arrived yet, but everyone in the business tells you that's
You've had almost no sales the first month
because you were only open part time and the construction
people were not finished. Nobody makes money the first
month in a business; so you figure you will catch up. You
might have to cut your part-timers' hours next month. The
next month it rains a lot, no money for advertising and
few customers came in to buy your wonderful stock, (by now
almost all arrived ... along with the C.O.D. invoices).
How quickly that $40,000 loan evaporated!
Your business fails to generate sufficient
revenue to cover its expenses. Your monthly payables
become competing priorities. You must choose which
invoices and statements will be paid and which will be
have to wait.
The suppliers say Sure, I understand. (what
can they say, they are unsecured creditors) but your
overdue unpaid invoices send a message to trade suppliers
that the business is getting into trouble and the account
will require watching. Suppliers often share credit
information among themselves and other suppliers are
quickly phoned and quietly asked if they have had any
difficulty with payments on your account. They become
concerned and respond by requesting immediate payment and
holding back some of your merchandise shipments. Their
bankers are asked to check with your banker to see if
there are any problems.
This is the first hint your banker has that
something may be wrong. The banker begins to worry about
the integrity of the $40,000 loan. The business plan on
which he/she had based the loan showed there would be lots
of money and sales revenue to cover the early expenses.
Your banker begins to wonder what has happened. Your
demand loan is now in danger of being recalled. Instead
the banker chooses to request that you put a little more
equity, more of your own cash, into the business.
The pressure pot has started to boil. The
landlord reminds you about your five year commitment, the
signage is on a long term lease, the suppliers are calling
for quicker payment, holding back shipments, more of your
time is needed because you can't afford employees, there
is no money for advertising and that friendly encouraging
banker is requesting more money be put into the operation.
You may have to sell your house and it is pretty
difficult, at this time, to interact normally with the
family at home....
A business plan is for a business, what that
flight plan is for an airplane en route to that distant
destination. The fact is, the more experienced the pilot,
the more certain you can be that he/she will not make that
flight without a detailed, well-researched flight