Cash flow, the amount of cash received and paid out each month in a business can lead a business to severe cashflow issues if the cash received slows down or is delayed. As a business is growing, cash flow planning and management becomes critical.

There are four main reasons for cash flow problems in a growing company:

• Sales growth does not come quickly enough for the increase in overhead.
• Accounts receivable grows too fast and is not under control.
• Inventory levels grow and absorb excessive cash.
• Too much working capital (cash) is used to finance a fixed asset.

In growing companies, negative cash flow can become an issue when fixed costs such as labour, rent, leases and advertising exceed any new income.

This is a critical stage in the growth of any company.  Growing companies must know how they will finance these additional costs prior to initiating growth, whether from retained earnings, new equity or bank debt.

A growing company should:

• Produce a separate cash flow forecast with any expansion to determine the cash needs of the project.
• Produce a best case and worst case scenario keeping in mind two rules of thumb – expenses occur right away and are usually higher than anticipated. Revenue income begins later and ramp-up occurs more slowly than anticipated.
• Develop a mini-business plan for funders showing short-term and long-term effects of the expansion.

Timing Growth

We all know the secret of good comedy is timing. The same is true in business. In seasonal businesses, timing can make a huge difference. Choosing the wrong time to take on the costs of expansion will make you wait too long for revenue growth, causing a cash flow crunch.

If you can’t time it right, don’t do it.