Growing your small business is usually a great thing, and in fact it’s what virtually all small businesses are aiming for. However, unless that growth is accompanied by sound financial planning, it can actually cause more harm than good. The truth is that growth often puts a pretty severe strain on any small business’s cash flow, especially when that growth is being fueled by cash flow money which is normally earmarked for expenses.
It can be just as bad if a number of small business loans are hastily arranged to cover the cost of business growth, because these can carry unfavorable repayment terms and poor financing rates. It’s very common to see poor financial planning like this at companies which experience sudden rapid growth, and it generally leads to unsound business practices that can negatively impact your small business down the road. Here’s how financial planning can be a real ally for your small business, and can help your growing small business on a much sounder footing.
Establishing an annual financial plan
At the beginning of each year, take the time to detail any planned investments for the year, and calculate how much financing it will take to achieve the level of business growth you envision for that year. Then take this plan to your financial partners, and work out a strategy for securing funding that will cover the cost of your investment plans.
Plan to avoid using cash flow
A big part of your financial planning exercise should be to devise strategies which will allow you to avoid using cash flow to finance any investments for the year. Even when your business seems to have a very positive cash flow, it’s a bad idea to use that money as a source for fueling business growth. There will inevitably come a time where that positive cash flow recedes, and if you’ve used up reserves, you could suddenly be in dire financial straits.
Organize all your finances
Organizing your finances means strategizing with your financial partners, whether they be bankers, investors, family members, or alternative lenders. The process of formalizing your finances should ideally occur with a financial consultant who can point out the optimal path for you to achieve growth, while maintaining a stable financial position for your small business.
If it makes sense in your type of business to include budgeting and forecasting, these are both tools which will contribute to the stability of your small business. It’s also a good idea to discuss with your financial partners what your plans are for future growth, and what you hope to achieve within a specific time frame.
Financing your growth soundly
Both your customers and your suppliers might be very helpful in financing your business growth in their own ways. If you are in a business where you serve as a supplier yourself, you can offer financing to your customers, which might provide an entirely new revenue stream for you. If there’s a big purchase you’re considering from your own suppliers, ask them about financing, because that’s an arrangement which could be beneficial to you both.
Another good way to boost your incoming revenue is to provide your customers with incentives and discounts which will speed up payments. And speaking of customers, if you identify certain customers which are very slow to pay, it would probably be to your advantage to drop them, for the sake of improving cash flow. This may sound harsh, but if you want your small business to grow, you need to exercise sound principles of financial planning, and that doesn’t involve catering to slow-paying customers.
You can use all the help you can get to run a small business successfully, and Doerhoff & Associates is here for you. We strive to provide what you really want and need – a unique and customized set of services to fill the gap and support you, the business owner.