I was talking to one of the Smart Currency Business account mangers the other day and we got onto the topic of one of his high-growth clients. J, the account manager in question, was helping the company with its cashflow management by minimising potential disruption from exchange rate movements.
Although on the surface of it the company had plenty of cash, they also had various problems after a recent fundraising round. It should be said that this is a fascinating company driven by a very capable entrepreneur and a forward-looking CFO. And yet it still ran into the same cash headaches that plague every other British business.
A cash balancing act
I have yet to meet a business owner who believes they have too much cash. You have to be aware of the rainy day and any entrepreneur worth their salt has probably been pushed to the edge one time too many.
For this business, the first problem was that stock levels were too high at about 9 months plus sales. The CFO wanted to reduce that pile of cash to six months, as it was doing nothing other than sitting there, much like the gentleman in the GIF below.
Although the business was selling direct at good margins, it was now growing sales through both Amazon and the wholesale market. But market-making giants like Amazon come with tighter margins, and this brings in the problems of payment terms and chasing debts.
When selling direct, payments from the clients came in more or less instantly. But when selling through wholesalers, you suddenly are now faced with the issue of having to fund those debtors.
Growing at a significant rate also means that the cash inflow reducing stock levels to six months may see no cash inflow. Growing sales significantly may see an outflow as stock levels, even if reduced to six months sales, is more than likely greater than it is today at nine months.
Plus, with the present geopolitical stress ripping up global supply chains, delivery from Asia now takes four months rather than two, and this must be funded up front. This may mean you have lots of stock on the high seas which will be a major outflow. How is this best funded, another question we can help on?
The value of certainty
That is why the CEO and CFO embraced J’s help as he was delivering huge value by supporting certainty around the company’s cashflow when it came to currency risk. Without certainty, this business would have found it difficult to sustain their high growth strategy, which would have been a great shame.
