Without proper cash-flow planning, growing, otherwise-profitable businesses can find themselves in big trouble
Cash flow is your business’s lifeblood. Even if yours is growing and profitable, it can still go under if you don’t take the right precautions. In fact, lack of cash kills around a quarter of all small businesses, including many companies that would otherwise be successful. So, before you decide to start growing your business, make sure you have a plan in place and the cash to back the move. Here’s how to get started:
Determine your most reliable sources of cash flow – and take a hard look at the rest
I always tell my clients to make sure their clients pay on time and cut those who consistently don’t. This is important for any business, but it’s absolutely essential for a business that wants to grow quickly. It doesn’t matter how much you have in unpaid receivables; if your expenses are growing but your pile of cash isn’t, you’re in for a rough ride.
However, sometimes, paying on-time isn’t enough. If you take a look at the data surrounding some of your clients, you might find that a few of them aren’t as profitable as they should be. Either they take up too many resources or your pricing strategy isn’t on point.
If your business is already acquiring new clients on a regular basis, this is likely the perfect time to get rid of the ones that aren’t profitable enough or renegotiate their terms. In the end, revenue doesn’t really matter – it’s profit and cash flow that counts.
Decide what kind and how many employees you’ll need to hire – and project their ROI
If you decide to grow your business, most of the time you’ll need to hire new employees. And employee salaries and wages are often the biggest expense of any organization, so it pays to hire wisely. Try to hire new workers carefully, deliberately, and ahead of time. In many cases, one great worker can achieve the productivity of two or more mediocre ones, so choosing the right candidates with a big ROI is essential.
By budgeting your prospective salary costs and slowly building up your team, you’re less likely to make rash hiring decisions you’ll regret – and pay for in terms of turnover or low productivity.
In the end, if you don’t have the cash flow to pay more salaries, don’t hire new employees, even if the customers or clients are there. You might feel like you’re giving up potential business but running out of cash is a death knell. Instead, make do with what you already have, turn down unaffordable new opportunities, and/or get rid of unprofitable clients, products, or lines of business to increase your profit margin, available resources, and ultimate cash flow.
Don’t allow your company’s infrastructure to suffer under the weight of fast growth
Growing quickly means you are often “too busy” to make sure your underlying processes are sustainable and scalable. Band-Aids are put on problems until the day when you can find a permanent solution. Bad idea.
Spend some time and invest in developing your infrastructure. Make sure you document your procedures. Find time to identify if the way you are doing things is the best way. The ultimate question: Is it scalable? If it’s not, figure something out that is. If you can’t – you might not be ready to grow.
Here’s the thing. You can grow your way into bankruptcy if you don’t stop and make the right changes. Many entrepreneurs want to grow quickly, but behind the scenes might be a company that is posting great top-line numbers but crumbling on the inside. While everyone aspires to rapid growth, those who are in it can feel out of control. And, in many cases, they are.
Instead of blindly growing as fast as you can in search of revenue, take the time to make a solid plan for expansion. Your bank account, your employees, and your business will thank you.
Profit Point Consulting’s mission is to accelerate the growth of small and medium-sized companies through sound, strategic advice, and proactive financial management. If you need a trusted advisor to help develop and execute your vision, call us at (973) 659-1430 or fill out our contact form.