Sound Business Growth

If you want to grow a business don’t you want to do it in a sound method that actually improves the business? Say “Yes!” Trust me, you do.

What Are You Growing?

Typically the focus of business growth seems to focus on one of the following and perhaps more than one of them:

  • Sales
  • Profitability
  • Market share

All of these, and likely more, are areas that make sense to attempt to grow. But sound business growth is not isolated. By that I mean that we must also consider the cost of this growth. Of course, we know if we increase sales of products there likely will be a corresponding growth in cost of sales. But, that is not the cost of growth I’m thinking of.

Capital

Management at many companies becomes so focused on growing one the three above areas that they lose sight of the capital demands. Oh, they may indeed recognize that in order to grow the way they want they may need to get additional equity investment or obtain loans, but do they consider the cost of this. Obviously an equity investor expects a reasonable return. Will this reduce the return to existing investors? Likewise, if loans are used to finance growth how much will the interest cost impact return on capital utilized. Perhaps even more important with loans are two other considerations.

Cash Flow

In the posting Cash Flow – The Bottom Line the importance of cash flow was discussed. How many companies have gotten into trouble because they took out loans to finance growth but then found their cash flow was insufficient to service the debt? That is certainly not sound business growth. Unless the growth produces sufficient cash flow in a timely manner to service interest and principle payments, perhaps it would be better to grow at a more moderate pace, even if that means financing growth internally.

Available Capital

Face it. There is only so much capital available in the total market and more importantly to a particular company. Let’s say your company can financially qualify for a loan of $500 thousand. Does that necessarily mean you should incur the debt? In general it is a good idea to not tap into the all the credit available. Why? Well, for starters you never know when there may be an economic downturn and your sales slow. You also do not know if your projections for growth will actually materialize. Without a little wiggle room in your debt commitments you could find yourself unable to make payments when due.

The Bottom Line

In the end it makes sense to avoid growing so fast that you risk the company’s financial stability. Remember the reality that unless a sale can be converted to cash it eventually becomes a bad debt. Additionally, unless this conversion to cash is made in a reasonable time frame a company can experience severe cash shortages. Probably more businesses have gone under due to poor cash flow than lack of profitability. Don’t let growth sink your company. Use sound business growth practices.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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