Interviews by Lindsey Norris
Johanna Hoffmann, managing principle, Oomph Group Inc., Toronto
On the Idea: They’re running lean and mean, and that’s key for cash flow. Their overhead expenses are not high at this point, and they also have a financial cushion that will carry them through 2010.
Red Flags: The whole thing swings on this machine. Innovequity’s managers acknowledge that the prototype may require adaption for each site. If it requires a significant redesign, they’re going to be eating their cushion of cash.
Next Steps: They need to continue to be conservative until the machine realizes the savings projected and clients see it operating in the field. Until then, they should really not spend any money beyond the core, which is getting it built, transported and installed on the site. Until the first client is thrilled and one builder after another is coming in the door, mouths dropping open and asking, “How can we buy one?” they should minimize every expense.
Bill Erichson, owner and educator, Pacific Training Innovations, Vancouver
On the Idea: The business model relies on a royalty-based system rather than a sale-of-product system. This means that Innovequity’s profits and cash receipts are deferred. They are effectively both the manufacturer and financier of the first two units.
Red Flags: There are two critical issues in any cash flow forecast for a business start-up: the starting cash position (capitalization) and the time it takes to become cash self-sufficient (burn time). Innovequity has serious problems on both accounts. The business model has stretched the burn time for this company to an extent that there is a greater need to finance this business.
Next Steps: Develop a monthly cash flow and carefully manage it. As royalties accrue, the company could sell this annuity for a lump sum to reduce debt and further develop the business. Remember, there are two ways to go broke in business. No profit is the slow, painful way; no cash flow is the fast, painful way.
Cindy Priebe, CMA, vice-president, corporate services, CMA Alberta, Calgary and Edmonton
On the Idea: The company appears to have conservative sales projections. Furthermore, they have considered the manufacturing warranty as well as the risk of downtime for their customer should the machine break down.
Red Flags: Although pro forma balance sheet and income statements are necessary, I’d recommend a cash flow statement, because entrepreneurs often underestimate the timing of cash flows. Innovequity may run short of cash, leading to an inability to fund future purchases, such as inventory to manage repairs. They should perform a sensitivity analysis to cash flows to project best and worst case scenarios, in case the cash they expect through sales or royalties for instance is not collected. The company acknowledges the potential for debate with the customer on cost savings. If a customer feels they do not realize the cost savings that translate into royalty payments, they may hold payments to negotiate a better rate.
Next Steps: The company should prepare a pro forma statement of cash flow along with a sensitivity analysis to determine the impact on cash flows if their estimates on collections or sales do not come to fruition.
Category: Business
Leave a Reply
