Rapid growth and the extra demands it places on working capital usually puts businesses under cash flow pressure. It's mathematically certain unless you're in a business where your customers pre-pay for what you sell them!
In some cases businesses struggle through, in others they fall over in the growth phase. It is important to understand that you cannot grow without planning on how you will fund the growth. Generating profits to fund it on your own will take too long.
Before aiming for growth in your business, you need to understand and address several issues, including:
- Cash flow optimisation - very important in the short and long term. You need to understand:
- Your cash flow cycle
- The demands of extra trading stock
- The impact of increasing debtors
- The effect and timing of your basic operating costs.
- Cash flow forecasting - essential for any well run business, this involves developing realistic projections for your operational budgets. Sensitivity analysis will help you forecast the impact of errors (10%, 20% or 30%) in your assumptions.
- Capital management - start by identifying how much capital the business needs and how much is being provided by the available sources. Your business is only funded from capital, debt, and retained profits and in the early days of the business there are no retained profits, so it comes down to capital and debt.
From the start there is a continuing requirement for capital management. This is about understanding:
- The initial requirements or establishment costs of the business
- Additional capital that will be required to fund growth
- The timing and amount required to replace or upgrade capital equipment
- Funding required to repay loans and retire debt
- Taxation requirements
- The expectations of the shareholders for access to profits
None of these items appear in the operating budgets of your business, yet each of these draw cash from the business. You could have a profitable business and be cash flow positive from operations, yet be under significant cash flow pressure. If you want to grow your business successfully, then a capital management plan must be regularly reviewed and a capital expenditure budget should be prepared each year.
The IX Growth Calculator highlights how much more cash becomes tied up in your invoices as you grow - cash that you will need to pay suppliers and cover other operating costs.
Inspired by a very useful piece of advice from the NSW Government: http://toolkit.smallbiz.nsw.gov.au/part/22/110/502