Q: I want to grow my business but I am concerned that expanding too quickly will negatively impact my cash flow. What is one of the top mistakes business owners make with cash and what would you suggest?
A: Managing your money and cash flow is a pivotal part of growing a sustainable business.
The biggest mistake that I see a lot of business owners make is not planning properly for big investments and making decisions without taking the broader impact on your business’ cash flow into consideration.
Growth should be planned out and strategic. I would conduct a sensitivity analysis around the decision with a best and worst-case scenario. Depending on your appetite for risk, how will each of these scenarios impact on your cash flow and are you then willing to take the associated risk?
There are a couple of questions you can ask yourself that might help in the decision making process:
• How much cash do you have on hand?
• How many clients do you have and what percentage of your revenue do your three biggest clients contribute?
Having more clients that contribute less is less risky to your cash flow than having a few clients that contribute the most.
If you lost one of these clients or had payment withheld due to a dispute, what effect would this have on your cash flow?
• How easily can you get access to finance?
As a small business owner, government and banks will generally give you favourable tax breaks and easy access to finance to try and promote growth so this is something you should look into.
• How easily can you service the financing?
• What would the increase to fixed costs be?
Financing costs are another fixed cost and you will need to pay it every month no matter how low or high your turnover is, which is something to keep in mind.
Getting intimate with your finances and knowing what your percentage return on investment is, is important.
Taking on some debt and increasing your gearing ratio can be beneficial to your business if the projects or investments you invest in offer a greater return than the debt servicing fees.
Additionally, making sure you have money in the account to pay two to three months’ expenses in advance is one way to mitigate the risks involved.
Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine by Mike Michalowicz is an incredible book to read as an entrepreneur to start effectively managing your finances and know that there is capital available if sales are not as good as predicted.
Cash is king, and a key reason why businesses fail is because of a lack of cash. Be wise with your investments, take calculated risks and plan for larger investments.
Become the scientist in your business and understand your return on investment.
Vanessa Hallick is an international business strategy and mindset coach