When business growth outpaces cash, problems follow
Congratulations on building a successful and growing business! As your business expands, are your finances prepared?
Business growth is exciting, but it can put an unexpected strain on cash flow. Many businesses fail not because of a lack of sales, but because they failed to properly prepare their finances and run out of cash.
By implementing a strategic financial plan, you can grow your business, improve cash flow, and build liquidity.
Grow, baby, grow
With new business growth comes new expenses: additional products, new hires, potentially expanded floor space, etc. It can be easy to get swept up in the excitement of progress – and to drain cash savings quickly to supplement this growth.
Why is it so important to improve your cash flow during growth?
- Strong cash flow reduces financial risk, so that you never have to face emergency loans, delayed vendor payments, or coming up short on payroll.
- Cash flow enables opportunity, so that you’ve got money on standby for unexpected opportunities such as new contracts and investments.
- Protects you and your business from unplanned emergencies – or even delayed customer payments.
Cash flow problems can have a huge impact – not just on your business, but on your personal life as well. In a 2024 study, 71% of small business owners said that cash flow issues caused problems such as stress and anxiety, burnout, and sleep deprivation. Taking care of your cash flow means you’re taking care of yourself, too.
Steps to improvement
Step 1. Shorten the Cash Conversion Cycle. Improving your billing and collections will help clarify payment terms and expectations so that customers pay quickly and the money is in your account – ideally within 30 days of service.
Step 2. Streamline expenses and inventory. Review recurring expenses and cut the non-essentials. Get rid of slow-moving or obsolete inventory, and try to maintain a lean inventory so that you’re not holding space. Do you best to purchase smarter, not more; now’s a good time to identify your profitable items and loss leaders.
Step 3. Leverage your financing strategically, not reactively. Credit lines are a safety net – not a last resort. Equipment financing instead of cash purchases can help balance cash flow so that there’s not a surprise dip in your accounts.
Get liquid
Your products and equipment are worthwhile investments and a great way to hold value. However, it’s imperative to maintain liquidity for your business to grow.
- Maintain a cash reserve of 1-3 months (minimum) of operating expenses. It’s not a bad idea to continue contributing to this beyond that minimum amount.
- Convert unused equipment or product back into cash where possible.
- Keep your debt manageable, and understand how repayments will affect your cash flow. Refinancing high-interest loans can help to free up cash every month
Make sure to keep a close watch on your cash flow and finances, so that you can continue to be proactive instead of reactive when situations arise.
Build your best business
Growth without cash flow can be a silent business killer. With these steps, you can continue to grow confidently, safely, and profitably.
