30. Growing Sales Won’t Solve Your Cash Flow Problem!
Growing Sales Won't Solve Your Cash Flow Problem!
Growth is often seen as the most critical thing a business must do. Grow or die!
However, if you have a cash flow problem, growth may be the worst thing you can do. Growth is one of the biggest killers of cash flow.
Watch this video to understand how growth affects cash flow and some steps to ensure growth positively impacts cash flow.
cash flow problems and growth
Hi today I'm gonna talk about cash flow problems and growing. So one of the great misnomers is that when people have a cash flow problem one of the first things they wanna do is they wanna grow their business. And however, that can be the exact opposite of what you need to do.
Now unless you're in the start up phase where obviously you need to grow your business, if you're in the mature phase, or you've reached a certain point in your business, sometimes growing your business is gonna be the worst thing for cash flow. So let me give you an example, I was working with this business, and they became all excited and they were gonna say how they've developed a new line and they found a different target customers to grow their business because they weren't happy with the profit that they had at that point in time. And me without thinking about it and without a filter, I said well you're gonna say goodbye to your cash flow. And they got offended by that and that was the last time I was invited back into their business.
Anyways, six months later I happened to run into them again and the first thing they said was, "Remember you told us to say goodbye to our cash flow, "when we were gonna grow the business?" And I said yes and they said, "You're exactly right."
And so why does, when you grow a business, why does your cash flow start shrivelling up? It's because when you have more sales then you may need more employees, unless you're not at capacity, if your employees aren't at capacity then you've got some room to grow. But if your employees are already at capacity then you might need more employees, you might need a bigger building or bigger office. If you've got stock, you're gonna need more inventory, then if your controls aren't in place your accounts receivable might blow out. And so you're gonna have a lot more pressure on your systems and everything that you have already.
So what I recommend people to do is make sure you're maximising your cash flow and your profit where you're at right at this present time. But then also work out what is a sustainable growth rate for you, for your business.
So the three things I wanna go through to work out your sustainable growth rate, first thing you wanna focus is internal controls. Make sure you have the internal controls set up and that they're working and that when you grow they can handle the pressure. So when I talk about internal controls I mean your accounts receivable, your inventory, your purchasing procedures, those sort of things. Make sure that they're all on par.
Secondly is capacity, this is on your resources and your systems. So how much capacity do you have with your labor at the moment? Are you going to need to hire more people straight away? What about your systems, can your systems handle where you're at at this point in time? Are you gonna have to upgrade your systems, how much is that gonna cost you?
And then thirdly then work at what's a sustainable growth rate based on these things? And so you wanna work out, you wanna plan, you wanna have scenarios, do some scenario planning of if I grow by this much and this happens, how much cash flow will I need? So do a cash flow forecast but do 5%, 10%, 20%, whatever you expect to grow. And so this is just a short video on growing your business is not necessarily the best thing for cash flow, it doesn't solve your cash flow. And I'll see you in the next video.