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Battling the Cash-flow Blues

Palo Alto Software, based in Eugene, Ore., opened in 1983 as a business-planning consultancy that was slowly nurturing a software product. A year later Tim Berry, president and founder of Palo Alto, launched Business Plan Pro, now the best-selling business-planning software. In addition, Palo Alto also sells Web Strategy Pro and Marketing Plan Pro — both based loosely on the successful first-born product. However, Berry is concerned that Palo Alto is too dependent on Business Plan Pro’s life cycle.

In terms of financing, Palo Alto Software had never seen outside capital until a year ago. Berry retains control of the company and now owns 89% of Palo Alto.

Here Berry explains his business’s problems and angst:

We have a classic problem: We work through the best distributors, but they pay us slowly. Our cash flow becomes stunted because of the magic of accounting: Assets are equal to capital. When liabilities double, assets end up being accounts payable.

The business we’re in is working-capital intensive. Ninety-one percent of our sales went through distributors’ channels in 1998. The good news is that in 1999, our sales grew by 40%, and the Internet is responsible. It takes up the slack as a new channel and cuts down on our reliance on our traditional distributors. Yet, we do about $6 million in sales, and we’ll still sit with $1.5 million in receivables.

To sum up, we better have the money to finance receivables, or else. It hurts sometimes. We once took an order for several thousand units and chose not to ship from July to November because we were so stuffed in receivables. In the end, we couldn’t do the sale.

Notoriously slow-paying distributors — who are the middlemen between Palo Alto and computer stores like CompUSA that carry our software — hamper cash flow. What can I do to better prepare for periods of tenuous cash flow as a result of distributors’ delinquency?

My other two problems are a bit more personal. Just this week, Palo Alto jumped from 10 employees to 35. I had to be a doer to get this up and running, and now I am becoming largely an overseer. After Palo Alto goes public, I will continue to consult and write, but until then, I need to become more comfortable with my evolving role. I fear impending boredom as I become less involved with Palo Alto’s day-to-day operations.

Lastly, I’m concerned that the stigma of nepotism will stick to my son Paul after he leaves Palo Alto. Are there any measures we can take now to make sure the worthwhile contributions he has made to the company aren’t trivialized by future employers? How will Paul fare in the job market after Palo Alto goes through an initial public offering in a few years?

Paul, now a Palo Alto vice president, was working with a consulting firm in New York when I convinced him to come back to the company in 1998. Since then, Internet traffic grew to approximately 1 million sessions a month, and Internet sales grew to more than $200,000 per month, all under Paul’s management. Despite this accomplishment, I’m wary that Paul may suffer from the stigma of nepotism attached to those who work for the family firm.