Nobody said growing a business was going to be easy, especially against a backdrop of economic uncertainty and a fluctuating marketplace.
But you may find that the current volatility in the market is opening up opportunities for growth. In our experience of dealing with businesses all over the UK, keeping it simple and having a sound plan are key ingredients in taking your business to the next level.
And one of the crucial aspects of planning is to make sure your business is well positioned to handle the changes – and that means efficient use of working capital.
Acknowledge growing pains
If you want to take the opportunity to expand and grow organically, you will need to have a handle on your finances – especially in terms of working capital. Higher stock levels to meet demand, a bigger marketing budget to reach new customers and, of course, you might need to hire new staff.
Test some growth scenarios
You need to map out what growth might look like. Weigh up the economy, your industry and marketplace competition to get a realistic measure of your growth opportunities. One way to do this is by conducting a “scenario analysis” to see if your existing working capital strategies will support different rates of growth.
An example scenario could be this: what happens to your cash position if your payments to suppliers grow by 5%? Could you still pay staff? If that looks good, experiment with numbers at growth rates well above your expectations. Getting some insight on these scenarios would also help build contingency into your plans.
On top of revenue growth, take a look at profit margins and overhead expenses to see how they will play out across different growth scenarios.
Consider credit over cash
It’s not always the best option for a cash-rich business to use the available cash to fund growth ambitions. Keeping that cash can help improve access to funding capital and reduce the potential cost of doing so.
Small businesses with poor or insufficient working capital often struggle to attract investors or agree deals with lenders. Creditors may ask a business to use assets as a form of collateral, viewing those without sufficient working capital as a risk or as poorly managed.
Why? In essence, working capital is a shorthand which proves your business is capable of paying back a loan or can help the investors to earn a return. So a cash flow issue is often viewed as a symptom of poor cash control, and will make funding for your business harder to come by and the terms available are likely to be less favourable.