Paper business growth versus real growth
You’re running a profitable business …on paper. Revenue is up; sales are coming in quickly… But your bank balance is another story.
Sound familiar?
Welcome to what is the actual cause of your problems…. Cashflow!
All too often businesses have paper growth…. Revenue numbers are up, contracts are signed, but actual cash payments haven’t landed in the bank. Add to that the capital-intensive nature of a growing business, and you’ve got more money going out than coming in!
Now you’re at a catch 22! You can’t afford to grow, but you can’t afford not grow!
This story is all too common, and we’ve firsthand seen clients that were contracted to government, sack 250 employees and go into liquidation, all because they didn’t manage their cashflows!
So, before you take a private loan, a 2nd mortgage, cashflow loan or invoice finance, we are going to give you the steps you need to take to plan and facilitate your growth!
What Happens When Cash Flow Breaks?
We don’t mean to be negative, but it really is important that you’re aware of the importance of strong cash flows, and what happens when they aren’t managed properly.
- Suppliers stop extending credit or ask to take a security position on assets.
- You miss payroll or tax payments.
- Tax liabilities grow and with it tax debts.
- Loan repayments fall behind and penalty interest kicks in.
- You start putting expenses on high-interest credit.
- Employees lose confidence in you, when you start missing payments.
Worse still, the opportunities you should be taking — the big contract, the discounted seasonal stock, the key hire — you let them go. Not because you can’t do the work, but because you can’t fund it.
How to solve your business cash flow problems
Step 1: Profit doesn’t pay the bills, cash does!
Here is the hard reality about business growth that most business owners learn too late. You can be profitable and still go broke!
Why do you ask? Because profit is an accounting metric, it isn’t a manifestation of hard-earned cash in your bank account!
So, whilst you wait 30, 60 or 90 days to get paid by your business clients, and whilst your books look profitable, your bank account is in the red!
Or worse yet you’re a B2C business that has cash coming in, but your expenses and capex costs exceed the income you have coming in!
In either situation, cash is king.
If it’s not in your bank account and just on the books, then it isn’t real.
Step 2. Forecast your growth, budget and adapt
A growing business equals more problems. Its counter intuitive but growing your business in most cases causes more financial problems.
Win a major contract? A marketing campaign went viral? Great! But do you have the cash to pay for machinery, employees and materials to fuel that growth?
What this fundamentally means is that you must plan on how you will grow and also fund that growth.
We suggest you plan your growth over two years, and you break it up into months and quarters. Prepare an accurate forecast and budget of CAPEX and OPEX. Then reconcile them as time progresses between actuals and budgeted. You should be looking at your financials every week and measuring your performance.
Why is this so important?
As my old university engineering lecturer use to say, you can only manage what you measure!
From this process, you should know the delta between your growth requirements and the cash you’ll have coming in, from cash at bank and profits of the business. This delta you can then use for step 3.
Step 3: Plan how your growth will be funded
From step 2 you should know your delta, between cash at hand, profits you’ll be generating and the capital you need for growth.
The delta that is projected for over the next two years, should give you an indication of how much business finance you need or investor capital.
Part of this delta may be funded by business profits, business finance and part may be funded through investors that have an appetite for private investments.
The best strategy is to not take investor funds at all if possible, so you retain ownership. If however, you are going to take investor funds, make sure you leave it as late as possible so can minimise any dilution to your shareholdings.
Step 4: Know your worth when getting investor funds
This is a in depth topic, but to keep things simple, if you’ve done a 2 year projection of your business, you will need to establish a fair valuation for the business for each stage of its growth. Ideally you want to raise capital as late as possible, so you can maximise the value of your business, whilst minimising dilution to your shares.
There are professional firms that will do business valuations for you and raising capital should be seen as a last resort so you can gain control.
If you’d like to know more, you can read more here with our corporate advisory services.
Step 6: Get the right business finance
Just because you have a lender offering you money, does not mean they are the right lender for you. Why? Because you may be entitled to more money that what you’re getting offered, and If that lender puts a security interest against your business or assets, they may block you from getting other sources of funding.
Therefore it is imperative that you work with someone that understands how to layer debt in the right way. As business advisers we are well versed in this art form, and we also help clients source capital to solve their problems in the short and medium term.
As a borrower you have various forms of capital available to you from bank funding, second tier lending, third tier lenders, private lenders, first mortgage private loans, second mortgage loans, equipment finance, invoice financing, cashflow finance, supply chain finance and alternative asset loans such as heritage plate lending. In other words, you have 100s of options.
Knowing how to layer debt and use various forms of funding is critical to solving your cash flow issues, and this can make all the difference between you thriving or your business dying.
Step 7: Unlock the revenue you’ve already earned with invoice finance
When most B2B businesses face cashflow issues, and they’ve already exhausted bank funding or they don’t have any other forms of security, one option to consider is invoice finance.
Whilst there are many lenders that offer invoice finance, more and more are becoming like banks. At RSC capital we’ve made it our mission to work with wholesale invoice financiers that don’t require property security, are happy to work with new businesses and in high risk industries.
Invoice financing benefits include.
- Get up to 80% of your invoices funded upfront.
- No need to wait for clients to pay.
- No property security required.
- Instant cashflow once invoices are issued.
- Get the cash flow to grow your business.
And the best part? It scales with your sales. The more work you do, the more working capital you can unlock. To learn more about our invoice financing solutions click here.
To speak to us today contact us here.
