While growth should be the goal of any business, unbridled growth can be highly damaging. You need to be aware of the risks involved with growing your business too fast.
There’s more to it than simply selling more products or services. Imagine increasing your sales by 30 percent only to find little or no free cash flow as a result.
Growing too fast really can send you broke so it’s important to understand how it can happen and how you can avoid this worst-case scenario.
Working capital and sustainable business growth
Working capital is fundamental to sustainable growth. Without appropriate planning in place, you can quickly get into trouble.
How you define working capital will depend on your business model but the basic principle doesn’t change.
Let’s say you assemble and sell wheelbarrows, which suddenly hit high demand. It may seem that all you have to do to generate more profit is to ship more wheelbarrows and send more invoices. But this is a gross oversimplification.
The number of invoices raised doesn’t translate directly into profit: you first need to take into account the costs of producing more wheelbarrows.
Before receiving income from the extra sales, you need to spend. You will have greater stock requirements, which could include the need for extended storage space and/or more frequent delivery costs.
The amount you are owed by your customers will more than likely increase: more invoices need following up and tighter debt collection procedures put in place. You may have extra wages to pay if your current staff are unable to handle the new sales without help.
These and other expenses associated with growth can strain your working capital to breaking point – unless you have planned for them.
If you don’t plan for the growth of your business…
Businesses that don’t plan for their growth commonly fund growth by ‘robbing Peter to pay Paul’ and by taking longer to pay creditors, the most common of which is the ATO.
This is not a sustainable long-term solution.
If you don’t pay your creditors, you risk damaging important business relationships. And, while the ATO has been slow to respond and easy to borrow from to date, this is changing. Delays in paying tax may affect your credit rating in the future.
If you do plan for the growth of your business…
There are many benefits to planning for the sustainable growth of your business.
Not least of these are the feeling of being in control and making sound decisions based on actual data about your business.
Having understood the working capital requirements for growing your business, you will be able to manage the growth at a rate that your business can comfortably afford.
Avoid the perils of growing your business too fast
One of the secrets to avoid growing your business too fast is to develop a three-way forecast for your business. This examines the impact of your growth plans on profit and loss, cash flow, and the balance sheet.
You can use these tools to forecast the working capital required to fund growth and identify sources of funding both inside and outside the business to take the pressure off managing cash flow.
q4 financial is known for helping business families to feel financially safe, confident and in control. We manage the growth of businesses sustainably using strategies based around three-way forecasting.
We can help you by accessing a line of credit, debtor finance, chasing up debtors, leasing equipment instead of owning it, and sourcing equity in your home. Contact us today!
NOTE: The information contained in this article is general and is not intended to serve as advice. No warranty is given in relation to the accuracy or reliability of any information. Users should not act or fail to act on the basis of information contained herein. Users are encouraged to contact q4 financial professional advisers for advice concerning specific matters before making any decision.