How Growth Can Be Bad For Your Cash Flow
Most businesses want to grow as they become more established, with the idea of increasing staff, premises and ultimately turnover.
However, it is a well-used adage, that you have to speculate to accumulate, meaning that if you want to grow as a business you are going to have to increase your spending in order to do so.
This can in turn, lead to cash flow problems.
Growing Too Quickly
For some, there may never appear to be a good time to expand the business. If you are currently working at capacity, you will be unable to take on more clients or orders until you have extra staff, extra stock or larger premises. And in order to pay the staff, purchase the stock or materials or rent a larger space, you need more revenue from more customers.
It is a catch-22 situation.
This is where the problem with cash flow can raise its ugly head. If you can’t fulfil an increased number of orders you can’t grow. Growth-related cash flow problems include:
- Increased orders or a very large order which can’t be fulfilled by your current capabilities, therefore requiring financial outlay in order to honour it.
- Fulfilling your increased orders but the new clients are on 30- or 60-day payment terms meaning a delay in cash flow.
- Having to pay expenses to fulfil your orders (e.g. materials or staff) before the order can be fulfilled and therefore months before payment.
Add to that the possibility that staff, now under pressure from increased workloads as well as the pressures of training new staff, could inadvertantly allow quality and core values of your company to be compromised.
With rapid growth it can sometimes take up to a year for cash flow to catch up with the expansion, and unless there is a cash surplus or financing available this could potentially be fatal for your business.
The key to ensuring growth doesn’t affect your cash flow or the integrity of your business, is by planning a steady, predictable growth.
One that can be carefully managed.
The growth itself doesn’t have to be slow but being able to prepare and then manage the growth will protect your cash flow and prepare you for change. One tool for managing growth is a cash flow forecast.
A cash flow forecast;
- Estimates the money that will come in and out of your business over the next year, month or week.
- Is a record to show whether you are achieving your expectations or not.
- Will allow you to ‘mock-up’ how increased staff costs or rental costs would affect the business.
- Can help you to budget for staff, material, and property cost increases.
- Can identify areas in the business where you can develop more efficient processes, reducing expenditure and therefore creating savings.
In addition to preparing a cash flow forecast it is also advisable to ensure that there are rigorous processes and best practices in place to ensure late payments are kept to a minimum, therefore reducing the cash flow problems from current clients.
If your company is expanding and you would like to discuss creating a cash-flow management strategy, a cash flow forecast or terms and conditions, book a call with Confident Cashflow today.