Don’t Do What I Did #003: Created our Private Hell by ignoring the balance sheet.

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Given that I had a “growth at all costs” mindset at 23 years old with my thirty seconds of business experience and virtually no scar tissue, it stands to reason that the only thing I cared about was growing the top line and assuming that the bottom line would take care of itself.  While that has validity…it is the balance sheet that determines whether or not your company will ever get to the point where the bottom line is taking care of itself.  This is a trap that many entrepreneurs fall into…and I even took accounting and finance at John Carroll University!  Go JCU!!  While our income statement at Caiazza Candy may have shown profitability (which was rare), the balance sheet showed many warning signs.  What were some of the signs I would have seen if I weren’t ignoring the balance sheet you ask?

  • That my bills were coming due before my cash was going to come in (negative current ratio) and that I would fall behind paying suppliers.
  • That my inventory was growing as a result of the fast growth which was putting my cash on ice until I could convert the inventory to receivables and then to cash.
  • That my leverage was getting so high I would not hit bank covenants, even with positive EBITDA.
  • That I was funding losses by borrowing on my line of credit which meant that I would not be able to pay my line off as required in my loan agreement, not only because of the losses, but because the value of the underlying A/R and inventory was less than the line balance.

At the end of the day, in addition to my actions, our lousy balance sheet was what was driving us out of business whereas a strong balance sheet would have allowed us to survive the “Idiot Curve”.

Takeaway: Profitability is obviously crucial. But no matter how profitable you are, you need cash to survive and grow or to survive until you turn the corner.  A profitable company can go into bankruptcy if it doesn’t have cash. Allowing your balance sheet to become illiquid and heavily leveraged because you are not paying attention to it may have the consequence of putting your company out of business, but between now and then, while you are trying to fix things, it may have one of those wonderful consequences called an “Unintended Consequence” that will put you and your team in your own private hell at the time you can least afford to go there….we’ll explore that one soon.

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