Most businesses have the ambition to seek growth but growing beyond your means can be damaging, sometimes creating a long-term detrimental impact on your business. The key is to plan your growth journey at a rate you can accommodate, and this will differ from one business to another.
An intrinsic part of building a business, growth is valued by start-ups looking to get off the ground, all the way through to successful companies aiming to boost their worth. And whilst quick growth can seem the best approach on the surface, if your business is not set up operationally to deal with it, growth can have a negative effect on your day-to-day cashflow, as well as long-term sustainability.
There is a saying that goes ‘revenue is vanity, profit is sanity and cash is king’.
But the truth is that many small businesses simply do not understand their true financial position, or even understand the reality of the numbers put in front of them. There is often a lack of accurate and timely financial reporting coupled with a focus on the wrong data altogether.
And whilst this is not patronising in any way, it is simply the reality of businesses that have the potential for success but are missing the right level of financial knowledge and expertise to get there safely.
Understanding the numbers is critical.
Move away from simply scrutinising the figures on paper and focus on the cash in the bank too; the money that actually belongs to your business. You can always start by analysing your profit and loss (or at least keeping a track of it), but you must also take into account your balance sheet, your outstanding debtor and creditor reports and an up-to-date cash flow forecast.
This will give you the reality. And the danger is that the ‘massive profit’ that you think you generated this year will now seem pretty worthless when you have an empty bank account and a huge list of creditors to pay.
This doesn’t mean, however, that growth should be hampered (or avoided), it simply needs planning; planning with a clear understanding about the relationship between profit and cash.
Business owners tend to think in terms of profits, but then spend in terms of cash.
Typically, if you have proven success on a smaller scale operation, then the obvious next step is to expand in order to maximise your revenue. This will inevitably bring increased costs, whether that be taking on more people, investing in new equipment or buying more stock. Your growth is suddenly becoming an expensive drain on your finances, not to mention the potential for the quality of your product or service to decrease with scale.
So, a business can be generating a good level of revenue and making a profit, but it can be meaningless if the profit is being absorbed and not turning into cash.
And the quicker you grow, the quicker you’re likely to run into cashflow problems – even if you are achieving the sales and you have money coming into your business.
Look at it like this:
Revenue is not the best measure of business health, it’s too simplistic to only look at income alone. You must also consider the margin attached to the revenue as well as the cost of generating it in the first place; all revenue is not equal. Growing your customer base and increasing your volume of sales is essential but doing this at the cost of all else is vanity; it does little more than provide a short-term ego boost.
Profit is a much more reliable indicator of the sustainability of your business and is proof of how robust (or not) your business model is. Seeing consistent levels of profit on your P&L is sanity but it is still only a snap shot if your business performance at any one time. It is not real, nor is it a guarantee that you are going to be able to make next month’s salary run, it is simply a figure on a financial statement; otherwise known as paper profit.
Cash is the one you can trust, it’s the reality (or the king!). Debt is to be expected, using other people’s money can be your saviour, but managing to maintain cash in the bank is like the biggest winner, it means you’re working smart. At the core of every deal you plan to do, every strategy you implement and every new person you employ, should be the cash implications – and only once you are happy with these should you go ahead.
Three important questions for a growing business to always ask are:
- How much cash do we have in the bank?
- What are our debtors versus our liabilities?
- What is the current cash flow forecast?
Cash is definitely the variable to have a good grasp of because when your business is chasing growth, it can be easy to get carried away and overlook the early warning signs of a potential cash flow crisis. Something as simple as a late payment from a customer is much easier to absorb when your cash position is positive.
In summary, the best growth strategy focusses on maintaining stability. Cash into the business is great but cash in the bank is essential.
If you’re looking to grow your business but need some expert financial advice on planning and managing the money, speak to one of our advisers for some guidance on how we could help.