Each week, we seek out expert advice to help a small or medium-sized business overcome a key issue.
Bug in a Rug Canada Inc., a baby-products importer, is the country's exclusive distributor of Sophie the Giraffe, a wildly popular eco-friendly teething toy from Vulli SA of France.
The company sells Sophies and dozens of other Vulli products to 650 boutiques across Canada and chains such as Indigo, Toys "R" Us, Shoppers Drug Mart, The Bay and Loblaws. Proud parents snap up about 180,000 giraffes a year. This makes Canadians the world's biggest Sophie consumers in terms of national birthrate after France, where practically all babies must have one.
The Milton, Ont.-based company also distributes 13 other lines.
Owner Jane Wood should be happy that her hard work is paying off. But here's the rub: She could be selling more Sophies and making more money on each of them if cash flow were not such a headache.
She has enough orders to fill containers, each holding 15,000 giraffes, which are made in France. But she doesn't always have the cash to get things started. A container, which may ship other products as well, holds about 120,000 euros ($168,000 Canadian) worth of stock, and Vulli gives her 60 days to pay.
"It takes four to five weeks to get here [by boat], and the invoice clock starts ticking the day it leaves France," Ms. Wood says. "By the time that container gets here, five weeks of that 60 days is sucked up, so there are three weeks left to sell the stuff and get paid on it, which doesn't happen." Her best customers pay in 45 days; others aren't so prompt.
So she places smaller orders more frequently and has them shipped via FedEx, which costs two to three times more. But even with a faster ship time, her company finds itself struggling to find the cash to fill new orders.
Recently, Ms. Wood said she had to "grovel" because a big payment to Vulli was two weeks past due. The company agreed to ship more product, but only enough to fill about 40 per cent of her orders.
"It's like we're always just squeaking through," she says. "The growth rate is going through the roof, so how come we never have any money?"
As entrepreneurs know, it's not always easy to persuade banks to provide short-term loans in such situations. A banker once advised her to stop growing so fast.
That advice didn't sit well with this dogged self-starter who has built her company to $3-million in revenue and is now showing a small profit.
THE CHALLENGE: How can Bug in a Rug close the cash-flow gap?
THE EXPERTS WEIGH IN
Ben Arber, head of global trade and receivables finance for Canada, HSBC Bank Canada, Toronto
This is a great problem to have in terms of being successful and fast-growing. Fortunately, there are a couple of low-cost solutions to Ms. Wood's problem.
One is on the import side in terms of the purchases she's making to supply to her customers, and the other is on the confirmed sales from customers.
Import financing is a straightforward way of enabling your supply chain and helping the purchases grow so you are not constrained by cash flow.
What she could do is use an import finance facility from a bank, which means getting the bank to make the purchases for her, buying up to 100 per cent, and then settling with suppliers. This way she doesn't have to use her cash on hand.
Then, given the quality of buyers she's selling to, the big investment-grade companies who are pretty reliable players, she can sell the receivables to the bank and not wait the 45 days on average to be paid.
This sort of financing costs generally 25 per cent less than traditional trade operating credit, plus it would improve her balance sheet.
Marcia Annisette, director, master of accounting program, Schulich School of Business, York University, Toronto
The most obvious solution for Ms. Wood is to obtain special trade financing from a bank. This should not be a problem as there is not a risk that these products are not going to be sold. It is a timing issue.
Then it is a matter of her relationship with her suppliers. If the relationship can be changed such that the product becomes payable even 45 days after delivery, that would give her some breathing space. But that depends on her negotiating power.
A third option would be for her to build in incentives for her customers to pay earlier, such as a 10-per-cent discount. Give them 45 days to pay, but tell them that if they pay in 25 or 30 days, there are discounts. This is an expensive source of financing, but it is something that is workable.
These three options are not mutually exclusive. Her solution could be a combination of them.
Sandra Hass, president and chief executive officer, Mothers Choice Products, Richmond, B.C.
The first thing Ms. Wood should do is look at how she negotiates her terms of payment. For instance, Mothers Choice (which has been selling products such as breast pumps, diaper bags, skin care and keepsake items for 20 years) always pays half when the products are shipped and half when we receive them. Ms. Wood should use her successful track record to negotiate good terms.
The other thing is that our small independent retailers – not the large chain stores – always pay COD, by credit card, so we have to absorb that 2-per-cent fee, but we have the cash coming in.
Ms. Wood needs a great relationship with her bank. If she has a $3-million company, she needs a $300,000 line of credit. It can be hard to get, but you have to have that leeway. She needs to have product in her warehouse at all times and to have that cash behind her.
THREE THINGS THE COMPANY CAN DO NOW
Money, money, money
Investigate trade financing options such as import financing, in which the bank effectively makes the purchases for her.
Negotiate better terms with her suppliers. A good payment record helps.
Incentives for quick payment
Tell customers that they have 45 days to pay, but if they do so in 25 days, they earn discounts.
Facing a challenge? If your company could use expert help, please contact us at email@example.com. Follow us @GlobeSmallBiz and on Pinterest. Join our Small Business LinkedIn group. Add us to your circles. Sign up for our weekly newsletter.
Interviews have been edited and condensed.