A growing company is usually a great thing. It means there is demand for your business in the market, which should translate to higher revenue and profit levels.
However, it isn’t always positive. Periods of high growth may negatively impact your cash flow, as the expenditure required rockets through supply and labour costs. If you haven’t had time to create a sensible strategy for growth, you will quickly find yourself running into obstacles.
If there is a delay between you fulfilling orders and your customers paying, there’s also the risk of the cash gap increasing as you bring in new customers.
If you want your growth to be sustainable and long-lasting, it is vital to manage cash flow well. We have listed our top tips for doing so.
What impacts cash flow during growth?
During a growth period, many factors influence cash flow. We’ve explored them below.
- Your cash conversion cycle. This is the time it takes to turn your raw materials into cash. Having efficient processes that maximise productivity will speed the cycle up.
- Staff. As you expand, you need additional labour to meet demand. If you don’t have the team you need, or your workers do not work efficiently, it will inhibit your ability to perform and slow down the sales cycle, restricting cash flow.
- Debt. If cash flow is restricted, it will become harder to meet your financial commitments. Falling into debt creates a snowball effect as your cash flow tightens further and further to a point beyond repair.
- Review your systems and processes
If you grow rapidly, your systems and processes will likely not be fit for purpose. Adjustments are required to cope with the higher demand.
Spend time reviewing your processes, so they are efficient. Examples could include instilling better credit management procedures to avoid delayed payments, refining your operations to maximise productivity and bulk buying supplies as part of a stock management strategy.
By amending your processes, you will create a well-oiled machine in which cash flow is maintained.
- Adjust your staffing protocols
Growth typically requires a larger workforce. More employees mean more salaries to pay, which impacts cash flow.
Make sure that salary expenditure is justified. Create a structure which includes all the roles you need to meet demand and fill them with people with appropriate skills. There is the option of combining positions where suitable to reduce the salary cost.
You also need to adjust your payroll systems to be suitable, or it could lead to financial barriers (for example, if wages are not paid when scheduled).
As your staff grows, it’s crucial to amend your working culture to satisfy and motivate them. It will boost productivity while enabling you to retain staff rather than having to recruit new (which carries a more significant cost implication).
- Manage suppliers
The supplies you require will increase as your company grows. Having solid relationships with your suppliers will enable you to negotiate better prices, which is integral for managing expenses and cash flow.
Economies of scale will play a role here, giving you access to lower costs per unit when you commit to larger volumes.
Remember to regularly audit your supplier contracts to see if they offer you the best price. By ensuring you are receiving a competitive deal, you will minimise your expenses and become more cost-efficient.
- Reduce your cash cycle
In many businesses, you provide your services before you receive payment. From sending out goods to customers in advance to providing services you send an invoice for later, there is a delay between doing the work and receiving money for it. This often leads to cash blockages.
By shortening the payment timeframe, cash flow will be improved as your company is left with a financial gap for less time. A reliable payment system should help, allowing you to seek payment once (or even before) an order goes in.
Credit management processes will also assist in minimising the risk of customers missing payment deadlines and the associated impact on cash flow.
- Use external finance
In times of growth, it is sometimes impossible to rely on your own finances. If you haven’t yet fully experienced the benefits of increased revenue but need to cover the increased supply and labour costs, you might not have enough funding internally.
In these instances, external finance is crucial. Fortunately, many funding options assist growth, including loans and equity. They will also boost cash flow for the interim period until the rewards of your growth become apparent.
With funding, you can invest in your company to create the perfect conditions for stable growth.
- Work with experts
Growing comes with risk. If done correctly, the risk is far outweighed by the rewards.
However, managing the process can go far beyond the skillset of one person. It is crucial to utilise external support in your mission.
Examples include recruiting accountants, solicitors, insurers and financial advisors to work through your growth’s financial and legal implications. Their skills will allow you to create a carefully considered strategy that brings lasting results.
It’s also worth working with a business advisor to plot your growth in a way that balances cash flow and promotes resilience.
A UKBA advisor will assist you in meeting your growth goals and maximising your financial power.