“It takes money to make money”
You’ve built a company that serves customers who want to buy your products and services. You’ve navigated through the start-up phase and now your company is growing rapidly. Your next challenge is to manage that growth successfully. A growing company will use up resources fast and be just as challenging to manage as a company that is growing too slowly. Without the right management, rapid growth can lead to bankruptcy just as easily as slow growth can.
We’ve all heard the story of the company that was losing money on each job, but the owner said he would make it up in volume!
What are some of the issues of growing too fast?
- Increased sales require more assets, requiring payment.
- Retained earnings and some borrowing will generate some cash.
- Unless the company wants to find an equity investor, there will be a limit to the amount of growth the company can achieve without adding too much risk to the company.
The good news is that it is possible to identify the Sustainable Growth Rate for a company and be forward-thinking in planning. The Sustainable Growth Rate is the fastest rate at which the company can increase sales without depleting its financial resources. By knowing when the company is above or below its sustainable growth rate, the owner can moderate growth to balance financial strength. If sales grow in excess of the sustainable growth rate, the company will have to
- improve operations—for example, increase the profit margin or
- borrow money or
- use reserves or
- some combination of these.
Who is most likely to find themselves in this bind? Smaller businesses. Anticipating these issues before they become problems usually requires more financial planning than smaller businesses have in place. Many companies see sales growth as something to be maximized and don’t realize that same rapid growth puts them in a situation where they need increasing amounts of cash to sustain their position. They could borrow money, but eventually they will hit a cap there too. This would be a place to be avoided, especially in a risky environment with the uncertainty of the pandemic.
If you would like to discuss your situation on a confidential basis, call Alison at 224-688-8838 or email me at [email protected]nsulting.com. We’re here to help you harvest your potential.