growth

Why Does a Fast Growing Company Bleed Cash?

The irony of growing a company quickly is that it tends to bleed cash, and a lot of it. Why is this so and what can you do to prevent a cash crunch to keep the momentum going?

A fast Growing company is likely to spend more money to feed the growth of the business then a mature, slow-growing business in such areas as marketing, employees, technology, equipment, improvements, rent, and so on. The key to not going broke is to manage the process to keep the cash inflows consistent and much greater than the cash outflows. For example:

Accounts receivable: Sales growth without receiving money coming in will be awfully painful. Make sure you have billing and collection procedures in place to keep the cash coming in timely.

Marketing: There are different thoughts on how much should be spent on marketing as a percentage of sales. However, instead of thinking about percentages, think about effectiveness of your marketing so that your cash is not wasted.

Improvements & equipment: Building out a new location can be very costly, but there are several ways to minimize the risk of setting up an additional location. First, make sure that your first location is profitable and producing excess cash flow, second, build up a cash cushion, and third, obtain favorable financing or use a combination of cash and financing.

Employees: As sales increase there is a temptation to quickly hire more employees, which is necessary. However, if you hire too quickly, then the productivity of each employee will be too low for you to make a profit. A good strategy is to create metrics, that if met, will let you know that it is time to hire another employee or employees.

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5 Traps to Avoid When Growing Your Business Rapidly

Growing your business, especially growing rapidly, can be a really great accomplishment, but there are dangers when growing too quickly. Here are several traps to avoid to ensure successful growth:

Cash flow: Quite often, a small business will have cash flow issues when growing too rapidly. This is due to a delay of getting paid, while expenses need to be paid for upfront or before getting paid. There are 3 solutions that can help depending upon your situation. The first is to see if you can obtain terms with your suppliers to delay expenditures, second is to obtain a line of credit to support your receivables, and third, which tends to be the hardest, is to build up a cash cushion first.

Finances: As you grow your business, the financial aspect becomes even more crucial to your success. This entails a focus on investing in more robust accounting software, accounting staff and/or accounting services, streamlined processes and procedures, and internal controls, to name a few.

Employees and management structure: Unless you enjoy working 24/7, you need capable managers to manage your employees (you have been hiring more employees, right?). It is easier to have a few people reporting directly to you then several dozen. Also, make sure to acknowledge and reward the loyal employees that helped you to obtain your success.

Personal time and wellness: It is very easy to put in excessive hours to handle the massive growth of your business. There will be times when you need to work extra, but if this becomes the norm then it is easy for your personal relationships to suffer, along with a decline of healthy habits.

Infrastructure and organization: This applies not only to the physical nature of your business, but especially your operations. Have you outgrown the physical space that you occupy? Are you using equipment, technology, or IT that is not keeping up? Are your vendors and advisors able to handle the growth of your business? What about marketing and marketing staff? These are all areas to consider; otherwise, they will act as barriers to your growth.

Growth needs to be profitable, stable, and smart; otherwise, your results can easily go in the opposite direction that you intended. Think long-term, strategically, and surround yourself with the appropriate advisors to help you along your journey.

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How Healthy Are Your Sales?

There are many ways of measuring risk, but did you know that your sales concentration may be placing an unnecessary risk to your business? This also applies to sales professionals as well.

I have seen it over and over again, whereas a small business relies heavily on one or several large customers, and then the customer disappears. Sometimes multiple large customers disappear at the same time. Either they go out of business, cut-back due to a slowdown, have management changes, or other various changes happen that are beyond their control. This will all impact your business as your sales now plummet.

As a good rule of thumb, you don’t want to have more than 10% of your sales from one customer. It creates more risk than necessary because you never know if or when things will change. There is an adage known as Murphy’s Law that states, “Anything that can go wrong, will go wrong.” Additionally, you don’t want to rely heavily on one referral source for new business either. Murphy’s Law applies here as well.

What should you do to minimize your risk? First, never build your business around one or a few customers. This may be the case when a business is relatively new, but over time it is a huge risk. Secondly, assess sales per client to acknowledge who the large customers are. And thirdly, you need to market your business to decrease your risk of serving a few large customers.

A healthy business is constantly looking for ways to reduce risk. This not only decreases your chance of set-backs, but increases your odds of insuring ongoing success.