27 Nov Funding – the lifeblood of growing a business fast
Want to grow your business rapidly AND safely?
Through working with a series of diverse businesses in the last year it has become clear there are just a few key factors that, when observed, ensure rapid and successful growth. Below you will find the four you need to keep your eye on:
Growing a business fast on a skinny margin is very tough. Years ago I consulted briefly on a rapidly expanding fashion business. Things were going well. Every season’s collection was twice the size of the previous one. Because the margin was around 50% the profit from the previous season was used to buy products for the next season.
In essence, the revenue doubled every season but the take-home pay remained… Very close to nil. And even worse, with each season the risk grew. Not a healthy picture at all.
You really have just three choices: Get your money before you deliver, at the time of delivery, or sometime after. Whenever you receive your money will not affect your profitability, but it will dramatically impact how fast you can expand.
In order to successfully and safely grow your business, you need to find a way to get paid no later than the time of delivery of your service or product. Here’s a simple piece of maths: According to Christian Luckow, CEO of Omniveta Australia, the average Aussie business gets paid on 72-day terms. That’s almost 2.5 months! Assuming an average rate at the bank for an overdraft of 16% it makes a 5% COD discount seem a small price to pay.
But the cash cycle is really what stops the business in its tracks. Let’s say you’re expanding rapidly, and the bank extends you an overdraft. However, the 2-3 months of revenue that most banks will at most extend will run out like water in the desert. Then what?
So make sure you design your business such that you get your money now. It’s safe. Even if it means lower income.
Yes, money does make the world go around… You need to ensure there is adequate cash in the bank for your daily, weekly and monthly operational requirements
So how do you do it?
Today’s answer is to truly draw on all available sources of funding. Government grants like the much-misunderstood R&D Tax Rebate, loans from friends and family, credit cards. But don’t be afraid to approach a bank or alternate funders like FIFO Capital.
If you’re aiming to build a big business look for investors, angels, private individuals or funding platforms like ASSOB in Queensland. Private investors, while they may feel ‘hard to get’ will often the most obvious solution to early-stage capital funding.
Use the cash for the right purpose
You can, of course, argue that cash is cash… But here’s the caution, that has sent many companies down the drain: When you start syphoning operational cash off to start new strategic initiatives. Say you open a new interstate office and fund it using operational cash. But you hit a few delays.
It takes another month before the lease is sorted out, then there is a delay with the people doing your fit-out, then a fault in the air-con delays your move-in by three weeks. Now your first hire, your sales person in the office turned out to be a dud, you have to find a new one. Before you know it you have six months of expenses on a lease, fit-out, legal, hiring costs, but you’re yet to turn a dollar in the new part of the business. In the meantime, you as the owner have spent time away from the existing core business…. Cash flow is draining everywhere you look. Didn’t you have a strategic reserve? Things are looking critical…