Your company is growing. Fast growth means higher sales volumes, greater awareness of your brand, and more cash in the bank, right? Well, not necessarily.
Unfortunately, when your company experiences high growth, it can seriously affect its cash flow. Significant monetary risks can cause a desperate need for new systems, processes, and investments – but in this situation, the gap between paying your business expenses and gaining money back from clients can present a problem.
Think about when you started your business. You probably had a clear idea of what investments you needed to make, what suppliers you would use, the staff you would employ, and how you would manage your cash in the first year of trading.
Fast forward some time, and your business is booming, but suddenly you don’t have enough investments in suppliers to keep up with the materials; you need to hire more staff to help manage the workload; and cash is getting sparse. It’s a tricky situation to be in, and you need to take action now to not only keep your company afloat, but make sure it has the cash it needs to sustain its expansion.
What affects cash flow during fast corporate growth
When your business is rapidly growing, there are a few factors that affect your cash flow:
Your cash conversion cycle
This is the time it takes for your business to turn raw materials into cash. Problems with processes, poor inventory management and low labour efficiency are just some of the elements that can change the cash conversion cycle (and often for the worse).
Staff
During growth, staffing issues can cause delays in production, workload challenges, and efficiency complications. This all affects cash flow significantly.
Debt
As other areas of your cash flow change, debts can become harder to pay. This can lead to more problems further down the line. Your banking facilities will be strained, and supplier relationships may become stretched, too.
Net working capital (NWC)
Net working capital is the difference between your company’s current assets and current liabilities. It’s a measure of your financial health. If you have a positive NWC then your firm is in good stead. But with your company undergoing high growth and rapid change, your net working capital is likely to falter.
These factors are worth noting for managing your cash flow through high growth periods. If you don’t take the time to look into them now, they may get out of control. Remember, one of the fundamental rules about business is using and overseeing your capital wisely, so it’s worth taking a step back to assess where you’re at, and what you can do to improve your predicament.
Controlling your cash flow is key
Taking charge of your cash flow is vital for your business’ success. Doing so will allow you to forecast for the future and understand how much money is actually available to you in any given period.
Development usually means a tighter squeeze on cash and increases in costs. Business planning is essential here. You need to know the best practices for moving your firm in the right direction and mitigating any financial issues.
So, how can you combat any cash flow problems when you’re taking your business to the next level?
Managing cash flow through significant expansion
There are several ways you can tackle your fast-developing firm’s cash flow. You will need to look at:
Your systems and processes
Now is the time to implement better systems in your organisation. Think of your business as a machine. You may have all the parts in place, but if you don’t have the oil to make it run smoothly, you’re going to run into problems. Choosing the right processes can stop your business from heading for a car crash.
Your staffing systems
We’ve already established that you will likely need more staff to combat the increasing workload as your business grows. Having a way of managing this is key. When you hire more people and your number of employees increases, payroll systems need to be altered, cultural aspects should be tackled, and costs need to be justified. A simple way to get on top of your staffing is with an employment forecast. This will help you understand the management needs of your growing workforce.
Receivable management
If you received money from your clients straight away, your cash flow would be flying, but unfortunately, that’s not the way things typically work. You need to do everything you can to reduce your cash cycle.
People take time to pay their bills, and delays are normal in any business, but when the excitement of rapid growth clouds business judgements it’s easy to lose sight of late payments and underpaying customers. Well-organised systems and thought-through incentives will help you keep on track with your receivables and aid your firm during its time of rapid growth. You can do this by offering discounts to customers who pay quickly, asking for deposits, streamlining invoice issuance processes, and actively tracking accounts.
Risk management
As your business grows, there will be more risks involved in the decisions you make. These may include legal, financial, and contractual risks, and it’s vital to have the proper procedures to confront these threats. Employing solicitors, financial advisors and insurance providers will protect your company – and the people within it – in the long term.
Supplier management
Managing your supplier relationships and performance is key to achieving better cash flow. Knowing your suppliers, what they can offer and how you can collaborate more efficiently will help you mitigate any risks. Create plans to go through your supplier’s costs and benefits to determine how you can keep them happy – and what they need to do for you in return.
Investment is sometimes necessary
Advancing your business takes time and money. It often means current profits can waver, and it’s a struggle to put suitable systems in place without the cash to do so. Sometimes investing in your company at times of growth is the best way to mitigate waning cash flows. It is crucial, however, to do this in the right way.
If you’re not sure where to start, here are some ways you can find additional funding for your business. Choose the right way forward, and this money will go into fixing and preventing many of the issues you’re facing at the moment; it won’t lead you back to the boat you’re in now.
Enlist the experts
You know your business back to front, but it’s sometimes it feels almost impossible to take a step back and see the big picture. Using an experienced finance director to help you plan for the future makes tackling tough decisions much easier.
Our FDs and virtual CFOs are experienced in high growth companies and know the processes firms need to put their best foot forward. They are there to help you control your cash flow in ways that will mitigate risks and enable you to develop fool-proof plans for the future.
Get in touch for advice on guiding your company’s finances through such an exciting period of development!