All successful businesses want to grow. However, rapid growth can be a mixed blessing, and unbridled growth can quickly become a burden with bottlenecks and organisational issues flaring – so how do you manage a business boom?

Growth brings new challenges across all areas of your business from staff to systems, to quality control, customer service, fixed costs, labour productivity, and to cash being absorbed by working capital.

Overtrading is a common cause of receivership after a recession as working capital is depleted –and fast growth means businesses simply run out of cash. Construction companies commonly fail because they take on too much work, are spread too thinly, leading to quality defects, weak project management and timetables slipping behind. Performance and liquidated damages claims soon follow.

Hence one of the most common outcomes if you are growing fast is the need to refinance with your bank, to provide facility headroom and liquidity to support your growth, as for many small businesses attracting new equity is not a viable or quick alternative.

While most companies plan and strive for growth, not all are adequately prepared to manage it when it happens unexpectedly and hastily. Fortunately, there are things you can do before you find yourself swimming in more business than you had ever anticipated.

Firstly, be certain that your company is not undergoing seasonal or one-time-only growth – in our volatile COVID world, expect the unexpected as a downturn or new lockdown could happen anytime.

Some questions to ask include:-

  • Do I have the necessary capital (equity and term debt) to finance my growth?
  • Do I have surplus assets that I could turn into cash if need be? This may extend to securing or re-mortgaging your house.
  • Am I expanding too quickly? Is it profitable gross margin business or is it growth for growth’s sake?
  • Am I hiring too fast? Have I got the right people on the bus, and is our labour productivity being maintained?
  • Am I collecting my receivables fast enough?
  • Is my inventory and stock turn in line with my growth?
  • Is my production line efficient? Are my input costs competitive, and is our supply chain secure?
  • Is our quality control and customer service falling?
  • Are our fixed costs or chassis right to run the engine?
  • Lastly, does my management team have the right competencies to handle our company’s growth? Where are our holes and blind spots?

The purpose of these questions is to diagnose potential weaknesses, where the cash is going or leaking and to gain more control over the key aspects of your business that impact cashflow.

A source and application of funds on your balance sheet can quickly tell you where the cash has gone – or is going – and profitability trend analysis is a vital component of your financial analysis. Trend is your friend.  Display your income statement in four different ways,

• $ for multiple periods / rolling twelve months
• Averages over the last four or five periods
• Common size expenses as a % of sales
• Dollars/unit e.g. in a restaurant $/customer or $/table or in a food business $/kg.

Common sizing quickly spots expenses that have changed – and highlights questions to be asked, the main question being why the change?

Understand your breakeven position and current headroom. Explore a range of scenarios that forecast your cashflow and future cash requirements when you hit targets, fall well short or knock everything out of the park.

Knowing this, you can look at your current financial situation and assess if you can make improvements. You may be able to get additional financing for working capital, restructure your debt or convert unused assets into cash.

Carefully consider how each situation would impact your business numbers in terms of employees, costs, resources, and so on. Knowing your threshold before a jump in growth occurs will enable you to recognise early on when you’re reaching capacity and allow you to react with agility because you already have a plan in place.

Invest in a well-built simple financial model that can provide these answers quickly. You’ll be thankful you’ve done it should your business suddenly take off.

Demonstrating strong management of receivables, stock, and payables plus control of overhead costs is key to gaining a bank’s confidence in your management team. Be particularly careful about maintaining cost controls during growth spurts where businesses often go on a spending binge.

Communicate early with your bank. Banks hate vacuums, and too many customers leave it too late to address refinancing needs. Understand banks like to be repaid and high growth companies usually need more debt support and are therefore regarded as risky.

You can also look for alternatives to conventional debt financing. For example, you may be able to negotiate better payment schedules with suppliers, or look at leasing vs. buying assets or asset financing for vehicles or plant, or maybe you can consolidate a number of loans to simplify things.

The key is to get the refinancing you need. Longer term debt with reduced monthly payments can be achieved by spreading your payments over a longer period.

After analysing your company, you will be better able to examine your ability to repay debt. A refinancing application is very similar to a normal financing application. In both cases, the lender establishes certain debt repayment conditions, which you must be able to fulfil. If you cannot demonstrate your repayment ability, the lender will not assume the risk alone.

New legal requirements imposed on Banks mean they require comprehensive business plans, strategy, and a credit story supported by both historic and forecast financial scenarios. This takes time and expertise to prepare. If it is not in your management team’s skillset – get independent advice.

In all cases you need to demonstrate:-
• Your management are competent and experienced
• The key risks are managed and mitigated
• That you have sufficient working capital and equity in the business
• That you can clearly demonstrate your ability to repay the loan/s

In conclusion, extreme growth is a good problem to have so long as you’re prepared for it. Combined with simple management strategies such as benchmarking stress points, empowering employees, optimising efficiency, and leveraging technology to create scale will put you in a strong position when your company finds itself on a hot streak.

BlueprintManaging a business boom