Most businesses fail because they had no cash left in the bank.
Without high margins, it’s difficult to grow without a capital injection
There will be many challenges to face while trying to grow. But for most, the biggest problem by far will be generating the cash needed to grow safely. You must continually focus on increasing your working capital and efficiently manage it while ensuring profitability does not slip.
The dilemma has become quite acute these days since there’s been an expansion of available capital. Spending your way into growth is very risky. With more capital available, the more capital is raised, the more capital is spent and the more capital is lost.
The more money you raise to grow your revenue, the less time you will spend on optimising your operation and improving your product/service delivery. Always be aiming for organic growth and only spend more if you have a highly efficient and profitable operation.
“Speed is useful only if you are running in the right direction”. Joel Barker
Do you need more working capital?
Should you be about to raise more capital to fund growth, make sure you have the basic elements required to achieve capital-induced growth:
- Is the market big enough, make sure there are enough prospective buyers of your products and services to support your growth plans?
- Only spend more on acquiring new customers if your cost of customer acquisition is profitable. Figure out how to optimise your customer acquisition cost.
- Growing in leaps and bounds is much harder and more costly the bigger the business becomes. Make sure you temper your growth projections and cost assumptions.
- There is a market advantage as the business grows, but it can be difficult to maintain your competitive advantage.
- It can become harder to deliver a customer experience, as you spend less time with prospects and customers, the time you had more of when you were smaller.
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Businesses losing capital in pursuit of growth or market share find themselves in trouble pretty quickly. You should be driving your business such that it operates within your working capital means.
Focusing your working capital on innovation to uncover more efficiency along with better products and services that drive growth and profit, is critical.