If growth is the engine of business, then cash is the fuel. A healthy cash flow is incredibly important to any small business.
But here is the great secret – and peril – of small business: the engine of growth, if left unmanaged, can become a cash-consuming monster that drives your business right off a cliff.A good example of how unchecked growth can become the enemy of your cash flow can be illustrated in the process of business expansion. Let’s say you have a wonderful shop that is doing well – so well you decide to open up a second storefront. Great. However, are you now deeply cutting into your once golden cash flow from the successful first location to finance the second? Are you sacrificing much needed upkeep and maintenance on shop number one in order to get shop number two up and running?
What about your people – your most precious resource? If you have, for example, a staff of five that is already running at max capacity, what happens when you add 10 or 20 percent to their workload? For many small businesses, this scenario can often lead to burn-out and employee attrition. If that happens, suddenly you are going to have to lump emergency recruiting and training to your already strained to-do list. Suddenly, a lot of your cash flow is interrupted and now flowing toward training and recruiting.
Sure, your business is doing great and all of sudden you’ve got a huge number of orders and your overall sales increases by 30 percent. “What a great problem to have,” you think to yourself. But hold on a second. Yes, sales are way up, but so too are your materials costs. What happens if your vendors can’t handle your demand? Or are you now taking on more risk and therefore need more insurance? Or do you need to purchase or lease a bunch of new equipment? Again, the magical cash flow is now rushing into other areas.
Did opening that second shop require new capital? You’ll probably need a loan to secure the real estate and equipment. But now, because you’re growing larger, your credit reporting and requirements change. Your bank wants to see a lot more detail about projections and receivables. Your bank has most likely witnessed many other businesses grow too fast and they are going to want to see clear evidence that you know what you are doing and that you can repay the loan and manage your business in a prudent fashion.
The other great secret – and peril – of small business is this: when business is good and growth is fast paced, many owners are too busy and excited to carefully examine their situation and diligently plan for the present and future. Don’t fall into that habit!
Don’t grow yourself right out of business.
Plan for growth. Treat growth as a precision instrument that must be babied and nurtured. A well-tuned engine uses fuel more efficiently, and your growth engine needs to also burn cash in a more precise and managed fashion.
Hopefully you assembled three critical tools when you first got into business – the leadership skills and/or team that has a keen eye toward managing growth, a group of trusted advisers and a carefully crafted business plan. The first, internal leadership, is such a key. Good leaders fundamentally understand that growth means change and change means that you can’t statically operate your business as it gets bigger, you have to evolve. The second, trusted advisers, usually a banker, CPA, attorney and insurance agent, have expertise in the exact elements of business growth and can provide you with sound counsel about your next steps.
The business plan is the roadmap that is going to keep your enterprise on the road and headed in the right direction, and keep the engine of growth and the fuel of cash harmonious to your direction of travel.
If however, you don’t have a group of advisers or you don’t have a solid business plan, stop the car! Get those key elements together before your proceed any further.
You got into business to succeed, today AND tomorrow. Yes, growth is great and every business person wants to ride their growth to greater and greater heights. But just like a car, growth can be a blessing and a curse. A car is an amazing machine that shrinks the world and offers unparalleled convenience, yet it also is a 3,000-pound piece of metal hurdling down the road at 60 miles per hour. Lose your focus and disaster can strike. So, too, can unmanaged growth.
Respect and treat growth responsibly and prudently, and you and your business can ride off happily down the road.
Kristy Weaver is senior vice president/commercial banking team leader for Columbia Bank.