How to plan capital requirements for growth?

The largest tree in the forest was once a little seed, planted in fertile soil.

Growth without working capital can become sheer hell.

Start by adjusting your business plan and business model for growth and prepare accurate budgets well in advance. Ensure your business model is scalable and one that works well, all day every day, in order to avoid surprises. Focus on making sales first, raising capital second. If you do this well, you might just avoid having to go into more debt or losing equity.

If you feel you are not going to be good at handling the financial aspects of the business during a growth phase, seek help as your time may be much better spent taking control of opportunities that will increase revenue and profits, rather than sweat over the money. Outsourcing to financial advisors, bookkeepers and accountants can also be very cost effective.

Take time to evaluate your systems and business processes to see what needs to be improved, or tightened up. Have confidence in your systems and processes, ensure they keep working even when things get tough with the stresses and strains of growth.

Harness your strengths and take the actions that will rid you of cash flow problems before any decisions are taken to grow the business and be sure to avoid unwanted growth spurts.

“Your organisation’s working capital needs to be continuously aligned with marketing to keep pace with your business growth”.  Peter Sergeant

Just because your business is making good profits is no good reason to start making it grow. The more you put money back into the business, the faster you’ll be able to grow and the more profitable your business could become in the future.

Building financial reserves can eliminate your financial problems forever. A penny here and a dollar there, placed at interest, goes on accumulating. In this way, the desired result is attained and you can enjoy you family and lifestyle more.

Growth is good and not necessarily bad. However many businesses fail because the owner wasn’t willing to invest sufficient working capital in having the business grow safely.  Others are surprised as they grow because that they were not educated in the pitfalls associated with growth.

As you grow your business, keep a sharp focus on important cash flow areas. Having a positive cash flow in a business that is growing is critical if you want to stay in business.

Yet cash flow is one of the easiest areas to control and improve as you are only dealing with a few critical things:

  • Sales budget – Sales fixes most cash flow problems. Work with a realistic budget and focus on the processes that will improve profitable sales.
  • Expenses – How easy it is to spend money. Focus on cutting expenses you can do without and expenses that will drive sales and profit growth.
  • Pricing – If your pricing is wrong you could sell yourself into oblivion. Ensure your margins are adequate to meet your goals.
  • Accounts Receivable (Debtors) – Never let this area get out of hand, people will use your money if you let them.
  • Inventory (Stock) – How quickly you can build up dead and slow moving stock at the expense of fast moving stock. Get rid of it as quickly as possible.
  • COGS (Cost of Goods Sold) – Know what it costs to put your product or service in the hands of a customer and be paid well for it.
  • Accounts Payable (Creditors) – Look after your creditors and they will look after you. They won’t want to lose someone who pays on time.

If you don’t manage these things well you may have to take on more shareholders and reduce your equity. Equity that could have been retained with more controlled growth. 

Personal Experience:

Many business owners we have worked with want to grow their business in revenue and in customer numbers, thinking that will solve all their problems. However, a large number go into a negative cash flow slide as they either can’t or they refuse to capitalise their businesses properly.

I have often had to deal with growth problems in my own businesses as well as others, including non-profits.  Growth problems, many of which could have been avoided, severely hindering the ability to grow and expand while undermining sustainability.

I will always remember capital injections. They are always followed by a growth spurt, particularly if people had been waiting a long time for the injection. Mind you strong sales can fund growth if there are gig margins.



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