Turnover and profitability of many businesses go backwards in recent times and people are nowstarting to look at how they can move things forward again.
The important thing to realise when dealing with a growing business is that growth generally requirescash. If we use a typical importer / distributor business as an example, in order to sell more stockto its customers it first needs to purchase more stock from its suppliers and this will require funding.Once this additional stock arrives and is sold, it may be several weeks before the business actuallygets paid by the customer.
Typically, as we see sales volumes increase month after month we will see the cash position of a business deteriorate. This is because both stock and debtors levels keep pace with the increasedsales activity. The cash generated from growth won’t actually be seen until turnover stabilises.
Some commentators have predicted that we will see significant business failures as we come out ofthe recession simply because business owners won’t be able to fund their growth. So, how do youmake sure that you don’t become a casualty of your own growth?
Here are a few strategies to consider:
- Put in place detailed cash flow forecasts to model what the likely cash impact of growth will beon your business. This will include mapping when supplier payments will need to be made,when sales are likely to take place and how long you expect your customers to take to payyou. A good model will allow ‘what if’ scenarios to be run so you can see how much cash willbe needed and when it will be needed based on multiple scenarios.
- Once you know how much cash you are likely to need, approach the bank early to discussoptions. You don’t want to be discussing extending your overdraft facility the day before youneed to make a big payment to a supplier.
- Make sure that your bank is on-board with your long term plans for growth. You don’t wantto have to approach the bank every few months to extend facilities as your business grows.Explain your plans to them and find a solution that will work as the business grows.
- Talk to your advisers and get their input. As accountants we are aware of financial productsthe different lenders have available and will be able to help find a solution even if your ownbank seems unable to assist.
Obviously the impact of growth on cash will be different for every business and they can be reducedby methods such as negotiating payment terms with suppliers, getting up-front payments fromcustomers and having great stock and debtor controls in place. The important thing is to plan foryour growth and understand what effect it will have on the cash position of your business. As the oldsaying goes, failing to plan is planning to fail.
Posted on Thu, 1 December 2011
by Shawn O'Grady