News Articles

spBF logo landscape

Update: The Australian and New Zealand operations of Bibby Financial Services were acquired by Scottish Pacific Business Finance in late 2015 to create Australia’s largest non-bank invoice finance specialist. Welcome to our website.

Scotpac Hidden GrowthWithout much doubt, growth is good. However, while every business owner naturally strives for business growth, it requires careful management and planning, otherwise it can pose significant risks for the enterprise. Growth is not simply a function of sales and revenue, but has hidden dimensions: Time, energy, stamina, determination, focus, discipline and leadership are required to combat the challenges associated with growth strategies. Here are some factors to contemplate.

New enterprises can be exposed
Fast-growing young businesses or start-ups are especially vulnerable. In the rush to expand, they often neglect fundamental business practices such as implementing sound credit control procedures, or they may ignore possible working capital and cash-flow constraints. The dilemma, of course, is that growing companies are the hungriest for cash, so they are most at risk.

Beware of overtrading
With the strong desire for growth, it can be very tempting to try and capitalise as quickly as possible. Overtrading is however a common problem, particularly for recent start-ups and rapidly expanding businesses. It occurs when cash flows are insufficient to meet the working capital requirements associated with new sales. This often means that the funding gap needs to be financed, which adds to additional interest cost which then means that working capital is pinched even more in a serious, and often fatal, downward spiral. How does it typically play out? A business takes on work or a prized contract, but finds that fulfilling the deal requires significantly more resources – whether it is people, stock or working capital – than are available.

Suppliers may have to be paid quickly, or even in advance, while the business could, for instance, have to hold stock for considerable periods. Cash-flow can then dry up courtesy of a gap (often a big one) between payments that are due to go out and payments owing. The upshot is that the business may face a scary cash shortfall and the risk of collapse. Effective debt management and credit control can help businesses avoid overtrading, ensuring they get paid more efficiently and have sufficient cash to pay suppliers and staff. Options can include offering discounts for prompt payments, while improving stock control should be part of the equation.

Ways to respond
In such situations, the business may have to slow down sales or investigate cost effective working capital funding solutions that better align sales with production and capacity. Common actions include seeking new equity from an outside investor (potentially compromising business independence); negotiating extended terms with trade creditors (which may come with increased prices or the removal of discounts) or increasing your bank overdraft (at the same time lifting debt levels).

Complexity is the enemy
High growth business can often layer up on unnecessary processes and support services, and in a high growth environment these can cause unnecessary complexity and drag on growth. Consider adopting ‘lean’ philosophy based on keeping your operation as simple as possible. Ask yourself two questions: 1) Can we simplify this process further? 2) Does this add any value for the customer? Odds are, if you answer ‘no’ to one or either of these questions there may be scope to reduce cost and complexity, allowing you to focus on managing growth effectively.

Think about debtor finance to safeguard your cash flow
Another funding tool that helps finance growth and frees up cash-flow in such circumstances is debtor finance. In essence, it is a line of credit extended against the business’ receivables, allowing it to convert unpaid invoices into cash – quickly.
A typical debtor finance facility will advance up to 80 per cent of the face value of the business’s invoice within 24 hours. Such facilities are flexible and grow in line with receivables, so you can get scalable working capital that meets business needs without having to continually renegotiate limits. Importantly, too, there is typically no requirement for real estate security with debtor finance.

How the service is delivered can vary, ranging from confidential invoice discounting (for larger businesses with a dedicated finance department) to the full management of accounts receivables (ideal for SMEs because it allows them to focus on growing their businesses rather than chasing outstanding invoices).

Look after yourself and your staff
Like cash, energy is a limited commodity in business and is always at risk with the ups and downs of running a small or medium sized business. Lethargy is the enemy and can lead to poor judgement or neglect which can derail any serious growth strategy, leaving your entire investment and the jobs of those you rely on to execute it, at risk.

As much as possible, avoid getting pulled into the ‘day to day’ through smart use of technology and empowering smart people. Ensure you have plenty of time to recharge and refocus on what is important. Your energy, and the energy you transmit to your workforce is critical to maintaining your growth rate. Business leaders often talk about building a ‘burning platform’ for change and growth. Work on the story you give to staff to ensure they share the sense of urgency around growth. Spend time away from the business to refocus, and reflect on your leadership and decisions and take inspiration from other leaders. Consider a leadership course, networking events with other high growth business owners or a business mentor to provide coaching.

Invest in relationships to support rapid growth
Forging strong relationships with your financiers and suppliers is a smart business move because they can better understand your business’s growth plans and play their part in your success. Consider it an investment and an ‘insurance policy’ which can support you through the inevitable ups and downs in business. High growth businesses need flexibility to maintain growth rates and lower growth or declining businesses need flexibility to provide them time to resolve issues.

< Back to News articles

×

ENJOYING OUR CONTENT?

Subscribe to receive relevant articles and news to help you manage and grow your business.

Your Name(*)
Please let us know your name.

Email Address(*)
Please let us know your email address.

Invalid Input