Every week, we will seek out expert advice to help a small or medium-sized company overcome a key issue it is facing in its business.
For Grail Noble, rapid business growth has been a blessing and a curse.
The founder and president of Yellow House Events — a Toronto-based events-management company that deals mostly with technology firms – is thrilled that her nine-employee company has increased its revenue by 1,200 per cent in five years to $2.7-million in fiscal 2010.
But the bigger her clients get, the harder it becomes for her to cover the upfront costs of their events.
In the event-management industry, companies have to pay vendors – hotels, caterers, event staff and the like – themselves when something is booked or by the day of the affair, Ms. Noble says.
But her clients don't pay her until 60 to 90 days after she sends them an invoice.
That's not a problem if a company gets a year to plan an event; it can then bill in increments and pay vendors closer to the party.
But tech businesses are protective of their intellectual property and products, so they only start planning events, like launch parties, weeks from the event date.
Ms. Noble sometimes has as little as 10 days to organize an event (though five weeks is more typical), and the whole thing has to be paid for well before she sees a dime from her clients.
"We get a lot of last-minute business," she says. "So the challenge for us is getting money in before the project is completed."
This is becoming more of an issue as her company grows. A recent $1.5-million project "started to stretch me," she says.
She points out that she does have cash in the bank, and because she doesn't have money tied up in goods or equipment, her cash flow is fairly fluid.
However, she often has numerous projects on the go, and she can't drain her bank account to pay for all of them in cash.
To help cover costs, Ms. Noble maxes out her credit cards and taps her line of credit, then collects receivables from prior events and pays off her plastic.
Occasionally, she's had to ask vendors for a short grace period, which she doesn't like to do.
"We have relationships with vendors that exceed that one-time event," she says. "We can't just keep saying we haven't received payment and can we change payment terms?"
Ms. Noble doesn't usually ask her clients to pay quicker either.
"Nothing can sour a relationship like money," she says.
If she doesn't figure out a way to get more cash in earlier on, her business could get itself into trouble.
"Reputation is everything in our business," she says. "If I start defaulting on my payment terms and can't use my vendors, the quality of my product will suffer."
The Challenge: How can Yellow House Events get more money upfront to pay for its events?
THE EXPERTS WEIGH IN
Shane Lawrence, Toronto-based associate vice-president of sales and service at TD Canada Trust
Many small businesses, like Yellow House, are afraid to talk about money, which I find funny. Big companies aren't scared to talk about it because they talk about it all day long. Ms. Noble feels like it implies a lack of financial stability, but it's sharp business practice to say you don't want to outlay a bunch of money upfront. She needs to get over that fear. She should talk to her clients and ask if there's a way to fast-track half the invoice so she can receive some money before the outlay starts. Or set up payment stages. Maybe get paid at the beginning of the year for four events over the next 12 months.
Also, consider going to a factoring company. You sell them your receivables – they take a commission up front and it could be as much as 10 per cent. But they'll give you the money now and invoice your client.
And, of course, she should talk to her bank, explain the situation and try and get the biggest line of credit possible. There are likely different levels of receivable financing options available to her.
Simon Rockliffe, Toronto-based senior manager with Ernst & Young
She should talk to the client and see if she can alter the structure of her payments. In these situations, owners often get prepayments for running events. You won't get 100 per cent, but she can get at least a portion to cover costs. Consider offering a "prepayment discount." Many companies are looking to improve their [balance sheets] and may be open to Yellow House offering an early payment discount. That could mean accelerating payments to 10 or 15 days in exchange for a 1-per-cent to 2-per-cent discount.
With the vendors she deals with regularly, she should create a preferred supplier relationship. Use similar vendors for different events. Create a partnership where they know that business will be channelled to them and the reciprocating benefit to Yellow House would be some kind of agreement to extend payment terms, or at least a more flexible payment arrangement.
Moe Somani, chief executive officer of Vancouver-based event-management company SOHO Business Group
We've had the same growth problems. One of the things we've done is to stipulate to clients that payment has to be before an event. We put it right in the contract and generally they adhere to that. Our [accounts payable employee] calls the company a week before the event to say they haven't received a cheque and that they can pay by credit card. Usually they'll send it—we had one client bring a $40,000 cheque to the event.
Still, "I'm sending a cheque" are famous last words. We require companies to give us a credit card number. If a cheque hasn't come, we'll process the card the day before the event. We can refund the payment when the cheque arrives.
When you're calling companies about paying, you need to have a really good accounting person that has a great personality. You don't want to have the typical accounts payable person calling up and freaking out.
THREE THINGS YELLOW HOUSE SHOULD DO NOW
Offer a prepayment discount
Every company is looking for ways to save money now, so offer a discount for payment within 30 days.
Work with a factoring company
Factoring companies will buy your receivables, which means you get a lump sum up front – minus commission – to pay for the event.
Create a preferred suppliers list
Guarantee a vendor regular work in exchange for a more flexible payment schedule.
Special to The Globe and Mail
Facing a challenge? If your company could use our expert help, please contact us at yourbusiness@globeandmail.com.
Join The Globe's Small Business LinkedIn group to network with other entrepreneurs and to discuss topical issues: http://linkd.in/jWWdzT