Complications of Growing Your Business And Cash Flow
Scale Up or Grow Out of Business?
As a business coach, I’m frequently approached by CEOs or business owners who are looking to scale up their companies. They want to grow, and they know that they are going to have to change the way they operate in order to achieve their goals. One thing they share in common is that they look at scaling up and growth as a good thing. However, it’s not unusual for them to overlook a very important question: “Will scaling up cause your business to grow to death?”
If Growth is Good, How Can You “Grow to Death”?
Sometimes, business leaders take a somewhat simplistic view of the growth process. There’s the assumption that more sales will mean more profit. If your revenues are $500,000 right now, then boosting revenues to $1,000,000 should put twice as much money into your (business) pockets, right?
It’s easy to overlook the fact that growth consumes cash. It’s not simply a matter of working harder or faster. You are going to have to change (transform) the way you do things. That’s why the process of scaling up is so important. That process, however, takes cash. Some businesses grasp the fact that they are going to need to change manufacturing or development procedures significantly to accommodate dramatic growth. But they often don’t recognize that all of this will have a significant impact on the way they handle their cash.
Transforming the Way You Manage Your Cash When Growing Your Business
Not only does the amount of cash you’ll go through change drastically, the speed at which you go through it also changes. You can’t rely on the cash flow methods that brought you to $500,000 in revenues to keep working when you hit $1,000,000— or $5,000,000.
In the mid-1990s, Michael Dell was growing his computer company by leaps and bounds. He was scaling up rapidly in a hot market. That sounds great, but Dell had a problem: He ran out of cash. It’s what Verne Harnish called “growing broke.” Every time Dell spent a dollar, it took the company more than 60 days until the money came back into the business as available cash. They had to transform the way they were managing their cash. Michael Dell brought in Tom Meredith as his new CEO to do that. Talk about a transformation! By the time Meredith left Dell 10 years later, Dell was receiving a dollar 21 days before it needed to be spent!
Your business may not need that kind of radical change to continue scaling up. But a lack of cash—even while you’re growing—can cripple your company, or even kill it outright. Even if you have a great product or service, great people, and great systems for other parts of your business, you won’t be able to sustain your growth if you can’t figure out how to keep enough cash on hand.
Is Borrowing the Answer?
The solution for too many companies is to borrow money to fund their growth. And while there may be situations in which that makes sense, most companies have to give up too much control when they take that path. In general, a better plan is to figure out other ways to better manage their cash flow. Here’s a look at 4 ways to improve cash flow when scaling up your company.
Growth is good. Scaling up your company to handle that growth is essential, however, if you don’t want to grow your company to death. What’s the state of your company’s cash flow?
Click on the CASH ASSESSMENT button below for a quick overview of things you may want to work on.