Financial Data
Updated 15 Oct 2019


How to manage your cash flow when your company is growing

As the CFO, you will need a strategy to grow the business without being tripped up by cash flow challenges along the way. This comprehensive guide can help you do just that


Nicole Crampton, 23 April 2017  Share  0 comments  Print


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The top priority for a majority of business owners is growing their organisations. Growth is one of the highest-valued characteristics of any successful entity. Expanding a business can offer the potential for multiple opportunities.

Employees, customers, owners and society all benefit in their own way, but managing this growth can be challenging on your skills as well as the business’ financial resources. Growth is usually the aim of most businesses, because the larger you are, the more profit you make. But, growth also comes with complications – particularly when dealing with cash flow.

Managing financial growth 

You will need persistence and balance to manage the finances of a growing business. There are two methods to improve your financial base and achieve growth:

  1. Grow gradually and allow profits to fund additional growth. This is a natural growth path, which is usually ‘slow’.
  2. Seek outside funding, such as debt or equity funding. This is a faster growth path, but can come with complications depending on the method of funding you choose.

Both approaches will consume time and energy. But, your determination, combined with a willingness to be flexible and adjust your plans where necessary will carry you through this process. Continual growth can place pressure on both you and your business’ financial resources too. Achieving growth goals can often take longer than initially anticipated.

You will need to balance the financial and operational aspects of growth when expanding your company. During a phase of growth, for example, marketing the business can become expensive depending on channels used while sustaining growth. To avoid this dilemma, you’ll need to come up with policies to balance the operational functions of the business with the financial aspects of growth. Here are three guidelines on when to attempt growing your business:

  1. You should only attempt growth of a business that is already profitable.
  2. The business’ existing debt must be balanced with equity, or you must obtain existing additional equity to balance future debt.
  3. Management skills and abilities need to balance with the increasing demands on management in a growing business.

Rapid growth can be unsettling

There are many entrepreneurs that have seen the ‘hockey stick’ growth charts of companies such as Facebook and Google. These charts show rapid growth both in the number of customers the businesses have and its total revenues. Certain businesses are made and designed to handle rapid growth. 

Software or technology companies work with highly-scalable products that can grow without its costs growing at the same pace. While you might consider this type of growth desirable, it can be a challenge if your business model doesn’t allow for profit to scale at an exponential rate – without a similar increase in expenses.

The best growth is stable, steady and reliable. Not every business can afford to grow rapidly, and if your business model depends on stability, a rapid growth period could leave you with long-term cash flow challenges.  

Related: 3 Things that are impacting your business growth

Rapid growth can negatively impact your product quality

When starting out and your business is a success, it’s tempting to expand as much and as fast as possible to maximise revenue generation. However, this often results in the quality of products decreasing with scale. It leaves businesses in complicated financial situations.

As an example, when a restaurant expands to multiple locations, the owner can only manage the quality at one of the restaurants and must rely on managers at the other locations to uphold the quality the restaurant brand is known for. If these managers don’t continue to drive quality, the entire franchise might develop a poor reputation.

If your business delivers an experience that doesn’t scale well, scaling can often rid your business of what made it great to begin with. Additionally, growing too quickly can amplify the impact of the flaws in your business model. A challenge that you could manage when you had 100 customers could become uncontrollable with 10 000 customers.

For example, Patek Phillipe & Co only produce 50 000 watches a year. Despite having 2 000 employees, it understands that the selling point is the product’s high-quality, which would reduce if the sales volumes were increased. This business is not scalable beyond a certain point, which is why you need to make certain your business can scale before you attempt to rapidly increase its growth.

When quality in one of your business’ key selling points, it’s arguably a better strategy to stay small and excel at what you do, than grow large in sales volumes and lose your advantage.

Growth often means borrowing capital

Consider this scenario; your business just recorded its best-ever quarterly results. Sales have doubled and your business’ profits are rising steadily. Based off this progress, you borrow more money to fuel even greater growth.

Growth and debt are often linked in business, as an enterprise becomes larger, the amount it owes its creditors can often increase. If your company has a good business model and healthy risk management, this is rarely a serious challenge.  On the other hand, if your business doesn’t have proper risk management, or has a business model that doesn’t perform once it’s grown beyond a certain point, it could take on more debt to fuel growth, which can lead to cash flow challenges.

It’s also tempting to maximise your company’s line of credit in order to speed up growth, but this could be a costly mistake. When growth isn’t closely monitored, it can become unsustainable. Combine that with large debts, and growth can cause unwanted cash flow issues.


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During the course of running and growing your business, you will need access to both short-term and long-term cash savings to pay salaries, suppliers, or even to save for a future project or large payment. Standard Bank provides a range of flexible Savings and Investment solutions, with competitive interest rates, to help you meet your business’s savings and investment needs.


Fix potential challenges before you focus on business growth

Although growth is an important aspect of a successful business, it shouldn’t be your first priority. Consider that an intense focus on short-term growth can leave you blind to financial challenges that could impact your business’ solvency. 

Before you focus on your business’ growth, perform a comprehensive audit of your business to locate and solve any management, product, service or accounting-related challenge that could potentially grow in size with your business’ expansion and development. 

Growing your business can mean growing your monthly profits, but it can also mean increasing your liabilities. If you grow your business strategically instead of excessively, you could enjoy stable earnings and greater financial stability.

Related: How to chase growth the right way

Smart cash flow management choices

A survey conducted amongst medium-sized American companies reveals that 83% of decision makers expected cash flow challenges to arise as they grew. However, it shouldn’t just be access to cash that keeps you up at night; using smart cash flow management choices to fund growth should also be a priority.

No matter how healthy your top line is, your next growth initiative will be short-lived if your cash flow isn’t stable and reliable. Fortunately, there numerous tools, tips and best practices that you can use when prepping your business’ financials for growth: 

1. Prioritise accurate forecasting

More than two-thirds of decision makers at medium-sized businesses surveyed identified one of the following three concerns with cash flow:

  • Accurate funds tracking
  • Having enough on-hand cash to create new business
  • Collecting on accounts receivable.

Addressing and solving these challenges is important for the health of your company, particularly if your business is looking to scale. If one or all of these challenges apply to your venture, you may want to start by auditing your working capital cycle.

This area can be a potential drawback for a growing business says Lee Swinerd, director of Turnaround and Transformation at KPMG in the UK. As an expert in cash and working capital management, Swinerd has witnessed many medium-sized businesses underestimate the vital step of developing an accurate forecast for working capital cycles.

“Many middle market companies in the US have a global supply chain. They may receive 30 days of credit from American suppliers, but when they’re working with suppliers in China, that timeframe can be much shorter,” explains Swinerd. He continues, saying that collecting receivables from enterprise customers can take up to 90 days, or longer. He stresses that accurate forecasting is critical in order to understand how, or if, your business can finance a working capital cycle of that length.

As a potential answer you can implement a payment solution that extends payment cycles. This could help your business avoid being overburdened, which could in turn help you create more reliable working capital forecasts.

Case Study: Little strategies make a big difference

Scott Cramton founded the theatre company, Murder Mystery Company in 2009. By 2012, the business boasted sales of USD4 million. With 30 full-time employees, and 800 independent contractors in 25 cities in the USA – doing roughly 5000 performances a year – growth proved to be the biggest challenge.

Cramton realised he was losing control of his company’s finances.

As the business grew, incidental expenses such as petrol, props, costumes, and copying playbills  were out of control, reaching as high as USD8 000 a month. "It was impossible for us to keep track of thousands of transactions,” says Cramton. Managers were sent around the country putting out fires, which cost the company as much as USD10 000 a month for airline tickets, hotels, and rental cars. 

During this, Cramton suspected that 5% of customers were sneaking into the shows without paying. While some customers were buying tickets online, as far as six months in advance. This was making organising the money difficult. Especially since the company had no real accounting system.

Cramton applied cost-cutting and organisational strategies to his company to reduce incidental expenses and ensure every customer was paying. He then had to decide whether investing in Cloud-based accounting software would be a smart move or would it just be a drain on the company’s cash.

The challenge here is that growth companies stumble because they either invest too much or too little into their business says Gary Kunkle, Inc.’s resident economist and a specialist in long-term growth strategies. John Terry, founder of Dallas advisory firm ChurchillTerry says that there are many entrepreneurs that focus on whether their investments will streamline things or add convenience, instead of focusing on if it will bring money in the door. If it won’t, he says they should just keep pushing forward.

Cramton decided for Cloud-accounting software and since then, spending has decreased by 75% and the savings paid off the accounting software in less than half a year. In 2013, the Murder Mystery Company generated roughly USD 12 million in sales. That’s an USD 8million difference in one year. 

2. Consider changing your view on payables and receivables 

Payables

Once you’ve developed your forecast, consider rethinking how you’re distributing your payments to suppliers and vendors. You could prioritise them by due dates and interest rates, structuring your payables to improve flexibility of cash flow.

Take Note:You don’t necessarily have to pay your vendor today if the payment isn’t due for 30 days. This will allow you to save that capital and put it towards inventory that could get your business a quick return.

You could also implement a programme or service that will assist your accounts payable department make efficient process.

Receivables

When pursuing receivables, it may be beneficial for you to invoice quickly, and offer early payment incentives. Keep in mind, offering a slight discount can be effective, but Swinerd says: “For businesses with small margins, discounts for early payment may not make sense. Make sure your margin can cover it.”

Case Study: I’m making a profit, so why am I running out of money?

Alan Knitowski treats cash flow like a religion at Phunware, his mobile apps company, but it wasn’t always like this. Knitowski co-founded his first company in the 1990’s, "We were burning money constantly, faster than was sustainable, until we became a buffalo charging off a cliff," he says. Fortunately, he was able to sell the company two years after founding it.

Cash flow challenges followed Knitowski to his next investment, Caneum, an IT outsourcing company. When California failed to pass a state budget one year, one of Caneum’s major clients was unable to pay its USD660 000 bill. At the same time, it wasn’t able to collect a USD750 000 payment from another client that was undergoing personnel shuffling. The global credit crisis hit, and the company went bankrupt the following year due to shortages of access to cash.

When your sales and profits are skyrocketing, it’s easy to assume your business is bulletproof, but companies can go from turning a profit to bankruptcy in a flash. This is because the company has become more complex and as your customer base grows, staying on top of accounts receivable becomes time consuming. New customers could insist on paying in 60 days even though you still need to pay rent, payroll and other bills in 30 days.

Meanwhile more cash is covering inventory, taxes, compliance expense, and debt. “As sales go up, cash can go down,” says William Lenhart, a business-restructuring consultant with BDO Consulting in New York City. “Every growing business has that problem.” Lenhart continues to say that many businesses fail to focus on liquidity. If you don’t make cash flow management a priority, Lenhart says: “You could be in big trouble in a short period of time." 

Knitowski now makes cash flow management a central focus at his company, including sending a break down to his management team so they can determine what is working and what is taking up too much cash. He regularly keeps up-to-date on his business’ cash flow, when he can see that his business will have cash flow challenges 12 months into the future, he organises a working line of credit to ensure the business never goes without cash flow.

3. Give your team the necessary tools and support 

Your accounting team can be a great resource when it comes to smart cash flow management, which is why you need to supply them with the tools they need to succeed. A possible starting point is your team’s tech resources; ensure it’s up to standard.

A cause of cash flow challenges is unreliable expense accounting, according to the survey 40% of decision makers report that their employees book their own fares and accommodation. This could be a challenging when trying to reconcile expenses. A solution could be to determine how your staff are recording their expenses, and that your expense accounting system may need an upgrade.

But don’t stop there, look beyond the immediate challenges and consider how improving your accounting department’s resources can help make your cash flow more manageable. 

Case Study: Invest in resources to make your team stronger

Robe Dube and Joel Pearlman founded Image One in 1991, for the first few years the closest thing they had to an accountant was Pearlman’s father, a corporate CFO, who checked their income statements over dinner.

After their revenue approached USD1 million, Pearlman’s father found a bookkeeper to serve as Image One’s controller. But, still neither founder paid attention to the company’s financials. “I wasn't willing to put the time in,” recalls Dube. “Our mind-set was, 'Just get out there and grow the business.'”

Business owners who start tracking their financial data usually find it an eye-opening, rewarding experience says Brendan Anderson, co-founder and managing partner of Evolution Capital Partners, a private-equity firm based in Cleveland, USA. With the abundance of easy-to-use financial dashboards, consolidating and interpreting the numbers has never been easier. 

Anderson says there is only a small percentage of business owners who use metrics to track and analyse their finances. Anderson says, “There comes a point in time when you can't do it all in your head, when there are more balls in the air than you can juggle.” 

With revenue approaching USD2.5 million Dube says: “Eventually, we came to understand that there's a lot more that goes into building a sustainable business than selling.” That year they began using a financial dashboard to monitor weekly metrics connected to liquidity, accounts receivable, inventory and sales. Employing this system changed the way the company approached purchasing.

Dube noticed that if they cut USD1 or USD2 from the price of each item they could increase the company’s margins. The business is now a USD15 million company, employing 60 people, with a full-time purchaser to negotiate better terms with vendors.

Anderson says: “It's amazing what you can do with a very traditional business when you put in a process and use numbers to drive decisions.” But you have to stick with the process says Anderson, “You get up every day and figure out if you won or lost, and if you lost, how you could do better," he says. “Without data, you're on the treadmill, battling the same fights you battled 10, 20, or 30 years ago.”

As your company grows in profits, it also grows in complexity, which can reveal hiccups in your systems and processes. If you take the time to correct these faults before you set your business up for growth, you can avoid making future challenges for yourself.

You need to ensure that the finances of your business are optimised; you should always be trying to improve the top line, by proposing strategies that will save your business money and reduce costs. Cash flow can make or break a business and you need to ensure you have everything running smoothly or you could risk running out of cash when you need it the most.


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If you’re looking to open up a business bank account, Standard Bank provides a Business Current Account that is simple to manage and allows you to transact in the way that works best for you.


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About the author


Nicole Crampton


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