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Growing businesses need to carefully manage many components, people, products, processes and importantly cashflow. If you run out of cash – all the good work on the other elements will be irrelevant.
While a growing business is an exciting goal, it’s important that business owners carefully consider the following factors that influence cashflow whilst you grow:
Each of these factors can have a major impact on the financial health and well-being of your business and need to be planned, monitored and measured as you grow.
Business growth doesn’t come free or cheaply. There’s always a level of investment to grow from your current state to a larger state. For example, let’s say you own a startup retail shop. You may need to pay a rental bond, do some branding, fit out the store, build a website, purchase stock, train staff, and buy IT systems. For the sake of this example, let’s assume these startup costs (or capital) amount to $300k.
As a new player, you can’t expect to be inundated with customers from the first days of opening your doors. Thus you’ll also need a working capital balance in order to trade safely in those first few months of business. Let’s assume this is $100k, bringing your initial costs to $400k. In the first months of trading, you’ve been making a profit but reinvesting this in working capital, or more stock so your store is full for your customers.
Now let’s say you want to grow your business by opening three more stores. They’ll each require a significant amount of investment & working capital (cash) for their openings, but your cash is currently tied up in your first store and profits generated being reinvested in stock. This is why cash must be measured.
As you can see, this growth scenario requires extensive planning, analysis and expert management as well as cash resources, investment from private funds or the business to take on debt to plug the cash gap. Does your business have access to enough cash flow to manage it’s growth? When you have planned to grow your business – have you forecasted how much cash you’ll require to achieve these growth objectives?
The more and more you sell, the more and more you’re often owed by your customers. When you have a large amount of cash tied up with your debtors, you often need a source of free cash to keep your business operating – pay rent, wages, taxes etc.
During periods of growth, businesses usually need to hire more employees to deliver this additional work to the customers. Employees are generally paid fortnightly or monthly, so you need cash with which to pay them. While you may be billing more as a result of your new customers, those bills may not be paid in time to turn around and pay your new employees. Therefore, careful management of suppliers and debtor days can be critical while you’re in a growth phase.
This is one of the key roles we can fill for you through our outsourced CFO services at Altus; we can help business owners to understand and manage their debt and cash cycle so they can afford to grow.
As your business grows and you take on more employees, you may need to scale up in many other ways as well. More people can require more structure and systems, more investment (cash).
As your business grows from 5 people to 50 people to 100 people and beyond, you need to manage each stage of growth and its accompanying costs. It can be important to invest in the systems and processes required before you leap to that next stage of growth; otherwise your plans for growth can fall apart when you reach issues due to gaps in process.
If you don’t invest in the systems and processes required, you may up with a larger business, but it can be a poorly constructed business that is vulnerable to the increased risks larger businesses face. Depending on your long-term goals, staying small and nimble with less risk and maintaining a higher profit percentage could be a worthwhile strategy.
Growing businesses need systems that will help them manage their risks, which can be significant. As businesses grow, they often take on more debt. They may have more leasing requirements such as asset financing used to pay for a greater fleet of vehicles or more equipment. More contracts can mean greater legal obligations – bigger contracts usually lead to bigger complexity.
Risk also grows as businesses do. This can be contractual risk, geographic risk, legal risk and even risk to the business culture. Do you have systems in place to manage all of these risks?
Clearly, growing businesses have significant cash flow demands due to employees, stock, debtors and other factors. When you can navigate your cash flow demands successfully and scale up the other processes that keep your business functioning, you can enjoy the many benefits that accompany business growth.
To learn more about managing cash flow or to speak with our business experts about any other business issue, get in touch with us at Altus Financial.
Set your business on the right path with this simple guide.
Make sure you’re on the right track with this online checklist.
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