When Business Is Great -- But You Have No Cash Flow

Last Updated Jun 3, 2011 10:29 AM EDT

By Alex Coppola
In 2007 Julie Pickens co-founded Boogie Wipes, a $6.5 million company that produces a saline nose wipe for children. The Beaverton, Ore.-based company's goal was to create an everyday product that was widely accessible to a national market. She began with Internet sales and word-of-mouth advertising, and within eight months found her first regional retail distributor.

The Problem
Soon after she secured regional distribution, Rite Aid picked up the product and the company stepped into the national market. "At that point, we ran into major inventory and cash flow issues," she says.

Namely, there was a sizable gap in time between when Pickens paid for her inventory and when she received payment from her retailers. "Retailers typically pay on a 42-day cycle, meaning in most cases, you're paid over a month after you ship your product."

Deficient cash flow can be especially tough on small, fledgling companies. For Boogie Wipes, it was devastating. "We quickly realized we didn't have the resources to sustain that gap," says Pickens. "We were stuck."

The Background
In a year, Boogie Wipes grew revenue by almost 200% to $3.2 million. "We were in 35,000 retail locations by the end of year one, including Wal-Mart, Rite Aid, and national supermarket chains," she says. Sustaining that kind of growth proved difficult. In addition to contending with expensive slotting fees and promotional calendars imposed by retailers, the company was under pressure to keep up with inventory demands.

Pickens needed enough inventory on hand to be able to fill retailers' initial orders and also replenish them. While standard manufacturing waiting periods contributed to the challenge, Pickens' real problem was finding the capital to pay for the product.

"We would pay for the inventory in full before we received it at our warehouse," she explains. The shipment would arrive a month later. Pickens would send it to her retailers within weeks and then not receive payment for another month and a half. Often, there was a 60 to 90 day gap in which Pickens floated her inventory without compensation. That lull in revenue put an incredible strain on the business. "It got to the point where we weren't able to hire new employees or even order more inventory," recalls Pickens.

The Solution
On the suggestion of a colleague, Pickens decided to contract with a factoring company. This financing group purchased Boogie Wipes' accounts receivable in exchange for immediate cash. Pickens gets roughly 80% funding of her invoice up front and receives the remaining 20%, minus a factoring fee (between 2.5% and 3.5% per 30 days), around a month later.

Initially, Pickens was skeptical of this model. She didn't believe that as a young company anyone would provide them with that kind of financing.

"The nice thing about factoring, though," she explains, "is that while they are taking into account the perceived stability of your company, they're actually lending on Wal-Mart, Target and Toys-R-Us -- companies that are, financially, very sound." It takes a lot of pressure off a small company, she says, and puts it on the large retailer.

"We could ship our product and collect that very same day," says Pickens.

She also worked out a deal with a manufacturer to get on net, 45-day terms meaning they erased the 30% down payment they were previously making on orders for inventory. They now pay only after the product has arrived at their warehouse. Pickens secured these terms through accrual accounts and by offering the manufacturer a two-year exclusivity deal.

With factoring and these new manufacturing terms in place, Pickens shrunk her financing gap down to virtually nothing. She had enough inventory in the warehouse to fill all orders and received payments promptly.

The Aftermath
While the factoring system has been in place for three and a half years now, Pickens' goal is to eventually wean the company off it. "We'd like to get to the point where we no longer need that kind of financing," she says. "But that can be difficult to do while sustaining growth in a consumer products company."

Pickens is still quick to admit, however, that the ability to factor was central not only in keeping the company afloat, but also in expanding it. She continues to see same-store sales growth in her national retailers, almost 40% YTD, and recently launched Achooz, a line of saline wipes for adults.

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