ASK ROCK: How Can Printers Avoid A Cash-Trap?
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Ah yes, the mysterious “cash trap.” You’ll most often see this referenced on investment websites, but I like to use this definition:
“Every business must invest its profits, if only to maintain a competitive edge and meet inflation. But if the required investment exceeds reported profits plus an increase in permanent debt capacity, it is a cash trap.”
If that sounds a little academic, let’s cut to the chase. Essentially, you don’t have enough cash flow to cover the cost of your new equipment, generate a profit, and also maintain your position in the marketplace without incurring too much debt.
For example, let’s say Printer A gets a huge order. A man walks in off the street and orders 100,000 catalogs to be printed in three weeks.
This is a huge boost in revenue. A can’t-miss job, right?
If only it were that easy. To put together an order that size, Printer A has to double his current printing capacity. That means more shifts, and more equipment. He decides to buy new equipment to meet the demand, and hire on additional staff.
The thinking here is if he adds more overhead, he’ll get motivated to produce more sales. But what he’s really done is get himself in a cash trap. Here’s what could go wrong:
• He loses his current customers because his service declines, so that at the end of this huge rush, all his long-term customers are gone, along with the big catalog order.
• He’s purchased the equipment instead of leasing it, tying himself to a long-term credit crunch.
• He didn’t double-check the source who ordered the catalog, and now the guy is late on his payment. The bank is squawking for their payment on the new equipment.
As you can see, it’s easy to walk right into a cash trap. But does that mean you should avoid big jobs? Absolutely not. It means you should carefully analyze your current cash flow, ensure you can take on new business without jeopardizing your current clients, and consider all types of financing.
The cash trap can be avoided. It just takes good planning and an accurate assessment of your current finances.
Rock LaManna is the President and CEO of the LaManna Alliance, a business advisory and consulting firm that helps printing owners and CEOs use their company financials to create successful strategies. Visit their website for more details on avoiding cash traps, including how to use a cash-flow statement.