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Beyond Survial #2
Westpac Beyond Survival #5
Business survival in the 21st Century - Seven key areas of failure
by David Dandie - Westpac Bank
Manage your Growth
If you ask the majority of business operators what are some of their key goals for their business, they will almost certainly include that in some way they want to grow and perhaps open more outlets to expand. When you ask how they plan to achieve this, their first statement will normally be by increasing sales. I once had a customer who could tell me what his sales were in any month of any year; 1970 in February, 1985 in March and so on. All he concentrated on was increasing sales volume, however his profits year in year out, were deteriorating. The aim behind increasing sales is ultimately to increase profits however this does not always happen. There are many other ways to increase profits apart from just increasing sales.
Don’t Grow too Fast!
Many of you would have heard of the statement ‘Don’t Grow too fast’ but what does this actually mean? Many people get swept away with the romantic dream that their business will grow and that they will be able to open several outlets. In many cases this becomes their driving force. There is nothing wrong with this dream, and I never say growth is a bad thing but what I do say is consider the potential cost of growth to your business. In many cases businesses grow too fast and are not in a position financially nor at a level of efficiency to support that growth.
In the last article, it was highlighted that profit and cash were two different things. Cash paid back short term debt and met every day expenses whilst profit is what pays back long term debt and supports your growth. Unfortunately profit is a limited source of funds and consequently if your business is going to grow at a fast rate you will require some form of capital injection in order to support the growth.
Consider some of the areas that growth will affect your business;
Employees - number of and associated management
Cost structure – wages, provisions, stocking
Productivity – labour, equipment, premises (size, use, opportunity cost)
Debtor control, cash flow
Working capital requirements
Hours worked, stress management and decision process
The list goes on
If you are not prepared for this or try and fund the growth from internal sources it will put pressure on the business to survive. Control your growth, manage your business as best you can and once under control then look at expanding, but don’t grow too fast.
How Much Do I need to Borrow to support my Growth?
There are several ways to fund growth. Using available profits, using creditors within their approved terms, getting an equity partner and the most common to borrow the money from a financial institution.
How much is needed to grow will be the next question. My experience is that people tend to grab a figure out of the air. Or they know that they need $150,000 but decide to go for $100,000 and then go back later for the extra $50,000 to complete the job. Do you think people come to the Bank to borrow the money before they need the money or after they need the money? That’s right, after. When is the best time to come to the Bank for the money? Every one knows the answer is before they need the money but not many do. It is easier for the Bank to assess the situation before the horse has bolted and it goes in your favour because you are proving to the Bank that you are planning and managing your business.
The Beyond Survival Workshop explains how to work out how much money you need to borrow to support your growth. If you don’t like how much money you need to borrow we explore the ways it is possible to reduce the amount simply by adopting some sound management skills.
Before you get swept off with the dream to grow fast ask yourself is it worth it? Whats involved? What is the overall picture and make sure you are ready for growth.
Please call 1300-769-441; +61 3 9802-5288; email or fax: +61 3 9803-8296
for finance and leasing assistance.
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