Why Is Additional Cash Needed to Support the Growth of Your Business?
When you increase the scale of your business, all of the numbers get bigger - revenue, direct costs and overheads. Even if you keep expenses well-controlled so that they don't grow at a faster rate than your revenue, the amount of money that you have with debtors will grow, and the amount you have to finance before your debtors pay will grow as your revenues grow.
Furthermore, in order to grow you will need to invest. System upgrades, additional people, better digital marketing all cost, and the costs arrive well before you start to get a return.
As an example, if you wanted to double the revenue, gross margin, and profit of your business, you could do that by growing your revenue by 15% per year, each year, for 5 years. But this means every year for 5 years, not 4 years out of 5, or 3.
Even where your costs are controlled so that they grow at the same rate as your revenues, your 15% growth will need an increase in funding of at least 15%. If you need to invest in the items I’ve described above, then your funding needs will grow by more than 15%. It is only when you have achieved the growth you desire, and allow your business to remain a similar size, that your cashflow stabilises, and you have greater cashflow and actual cash than at the start.
What Steps Need to Be Taken to Obtain the Cash You Need to Grow?
The Benefits of Growth Funding
Almost of all my clients need either funding or growth funding at some stage, and a number need it constantly. I use the steps I’ve detailed above, and create and maintain funding forecasts using Forecast 5, helping my clients build, maintain and improve the quality of their relationship with their bank funder.
The good news is that when your bank is happy, you will also be less stressed, you will be able to pay your expenses on time, and most important of all you will be able to pay yourself on time.
Funding is the lifeblood of any business. More businesses fail due to lack of funding than any other reason. Get your funding under control, grow your business, and enjoy reaping the benefits for your team, your family and yourself. Done right, growth funding can be your friend. I see this with my clients every day.
What can Happen with an IFF
I have, and have had clients with either minimal funding or the need growth funding. Some clients have had their employees steal from them, or suffered from fraud of some kind. In every case, if they had an IFF in place, the stealing or fraud would have been uncovered almost before it had a chance to take root.
For example, a business provided a critical service to the building industry and employed 30 tradespeople who did work that was then charged to customers. The business seemed to be profitable, but one day it ran out of cash, and when an investigation was held, the business needed $1 million to survive. The cause was employee fraud. The owner of this business loved fishing, and had worked very hard, putting all of his income into a $1m custom built fishing launch, which was his pride and joy. He had to sell this fishing launch, and inject the $1m sale proceeds into his business.
From then on, he ensured that he had an IFF. He has had no problems since, has secured additional funding, and has acquired a smaller fishing launch while he builds up to replacing the $1m custom original. Nevertheless, it was an expensive lesson.
It is not only fraud that causes funding problems. Growth, the need for new or replacement plant and equipment, IT systems, new premises, digital marketing systems, the list is very long. An IFF provides the solution to all of these additional funding needs.
When you increase the scale of your business, all of the numbers get bigger - revenue, direct costs and overheads. Even if you keep expenses well-controlled so that they don't grow at a faster rate than your revenue, the amount of money that you have with debtors will grow, and the amount you have to finance before your debtors pay will grow as your revenues grow.
Furthermore, in order to grow you will need to invest. System upgrades, additional people, better digital marketing all cost, and the costs arrive well before you start to get a return.
As an example, if you wanted to double the revenue, gross margin, and profit of your business, you could do that by growing your revenue by 15% per year, each year, for 5 years. But this means every year for 5 years, not 4 years out of 5, or 3.
Even where your costs are controlled so that they grow at the same rate as your revenues, your 15% growth will need an increase in funding of at least 15%. If you need to invest in the items I’ve described above, then your funding needs will grow by more than 15%. It is only when you have achieved the growth you desire, and allow your business to remain a similar size, that your cashflow stabilises, and you have greater cashflow and actual cash than at the start.
What Steps Need to Be Taken to Obtain the Cash You Need to Grow?
- Ensure that you have monthly financial accounts (profit and loss balance sheets) produced each month, as without these actuals, updating any forecast produced is not possible.
- Have an integrated financial forecast produced, as follows:
- Create a revenue forecast, by month, for the current financial year, and also the next financial year. This revenue forecast needs to be by customer group, and also by product group.
- Take your monthly accounts for the last year (two years is ideal) and have a profit and loss balance sheet, cashflow and funds flow forecast produced. This is called an “Integrated Financial Forecast’ (IFF). Banks will hardly ever provide additional funding to an existing business client, or a new client, without this IFF. I produce IFFs for my clients using a tool called Forecast 5.
- Why do Banks want an IFF? Because they want to be able to confirm that:
- The profit and loss forecast is realistically achievable given the current size of the business.]
- Balance sheet trends show net assets increasing by the same rate as revenue increase
- Cashflow trends show how and when any funding provided by them will be paid back."
- The bank also wants to see a funds flow forecast, as this shows that the cashflow forecast is tied back into the P&L, Balance Sheet and Cashflow forecast, and that the whole forecast makes sense, is logical, and is achievable.
- As important as the IFF is, the monthly update of this forecast is just as crucial. By replacing each month of the forecast with the actuals for that month, you and the bank can see that the forecast is meaningful and is being achieved. When your bank has confidence in you, it will be happy to increase your funding as you continue to grow your business.
The Benefits of Growth Funding
Almost of all my clients need either funding or growth funding at some stage, and a number need it constantly. I use the steps I’ve detailed above, and create and maintain funding forecasts using Forecast 5, helping my clients build, maintain and improve the quality of their relationship with their bank funder.
The good news is that when your bank is happy, you will also be less stressed, you will be able to pay your expenses on time, and most important of all you will be able to pay yourself on time.
Funding is the lifeblood of any business. More businesses fail due to lack of funding than any other reason. Get your funding under control, grow your business, and enjoy reaping the benefits for your team, your family and yourself. Done right, growth funding can be your friend. I see this with my clients every day.
What can Happen with an IFF
I have, and have had clients with either minimal funding or the need growth funding. Some clients have had their employees steal from them, or suffered from fraud of some kind. In every case, if they had an IFF in place, the stealing or fraud would have been uncovered almost before it had a chance to take root.
For example, a business provided a critical service to the building industry and employed 30 tradespeople who did work that was then charged to customers. The business seemed to be profitable, but one day it ran out of cash, and when an investigation was held, the business needed $1 million to survive. The cause was employee fraud. The owner of this business loved fishing, and had worked very hard, putting all of his income into a $1m custom built fishing launch, which was his pride and joy. He had to sell this fishing launch, and inject the $1m sale proceeds into his business.
From then on, he ensured that he had an IFF. He has had no problems since, has secured additional funding, and has acquired a smaller fishing launch while he builds up to replacing the $1m custom original. Nevertheless, it was an expensive lesson.
It is not only fraud that causes funding problems. Growth, the need for new or replacement plant and equipment, IT systems, new premises, digital marketing systems, the list is very long. An IFF provides the solution to all of these additional funding needs.