While growing your business may be your goal, it is essential to understand that unbridled growth can be damaging. Imagine increasing your sales by 30% only to find little or no free cash flow as a result. There’s more to growth than simply selling more of your product or service. Growing too fast really can send you broke.
Working capital is fundamental in the equation for sustainable growth and without appropriate planning in place, you can quickly get into trouble. How you define working capital will depend on your business model, but the principle doesn’t change.
Let’s say you assemble and sell wheelbarrows which are suddenly in high demand. It may seem that all you have to do for more profit is 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 account of the costs of producing more wheelbarrows.
Before receiving income from extra wheelbarrow sales, you have 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 to be followed up and tighter debt collection procedures 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 growth…
Businesses that don’t plan 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 and delays in paying tax may affect your credit rating in the future.
If you do plan for growth…
The benefits of planning for sustainable growth include 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, you will be able to manage growth at a rate that your business can comfortably afford.
How we can help…
q4 financial can help you plan for sustainable growth. Part of our solution is to develop a three-way forecast for your business that examines the impact of your growth plans and your profit and loss, cash flow and balance sheet. We use these tools to forecast the working capital required to fund growth. We can also help identify sources of funding both inside and outside the business that can take the pressure off managing cash flow. These may include accessing a line of credit, debtor finance, chasing up debtors, the lease of equipment as opposed to ownership, and sourcing equity in your home.
q4 financial is known for helping business families to feel financially safe, confident and in control.
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.