When you’ve been in business for a few years it’s easy to think the most difficult times are over but, as Rob Lamers points out, it’s important to remember business growth should be a long-term goal. Here are some things to watch out for when growing your business.
We’re all familiar with the popular adage that the biggest spate of small business closures happen in the first years. So, once you’re over that hurdle, it’s tempting to think that there are smoother waters ahead.
Unfortunately, for many businesses, the middle years, where the business expands from its small business roots into a larger business, can be a critical time if the growth isn’t properly planned for. According to a 2007 study by credit checking firm Veda Advantage, of the companies entering into external administration in 2007 the highest rate of business closures occurred in the third and fourth years of operation.
So what causes successful small business start-ups to crash and burn at a time when things should be going well? The answer is typically money – not enough of it when it is most needed. When your business is growing, you need additional cash to purchase equipment, supplies and to pay salaries and this cash is often needed ahead of the time when you receive payment from your customers. At times of growth, it’s vital that you have cash flow available to fund these increased expenses. If money is tied up in debtors it simply isn’t available to meet the business’ obligations.
Juggling the needs of a growing business can be a manager’s nightmare. While a business owner may have had very tight control of the business finances through the early years, this may not be the case when the business starts to flourish. It’s all too easy to get distracted by the excitement of the growing business and to overlook the basics.
If you no longer directly track the financial health of your business, you need to put in place policies and procedures that ensure you get regular reports that let you assess how the business is going so you can take action if there are problems. These reports aren’t difficult to produce and they include aged debtors and cash flow reports and budget comparisons. These will show you what monies are owing and how much cash you have on hand. Without these, there’s a risk that you’ll assess the success of the business by how busy you are, when success is really not achieved until the money is in the bank.
In a growing business, it’s important to have good quality customers, particularly if you allow them credit. You need customers who pay on time and this is particularly the case for customers who represent a large portion of your business income. If big customers fall behind in their payments, the effect can be disastrous for you.
Who is a good customer, and who is not, can change over time. A business that started out as a good payer, may not be a good payer a few years later – the management may change or the industry itself may be experiencing difficulties. You won’t know this is the case if you don’t keep an eye on who owes you what and for how long. If you only advance credit to businesses in good financial standing, not only are you more likely to get paid, but other cash flow solutions such as debtor finance are available to you. The quality of the debtor is an important factor when applying for debtor finance and, let’s face it, if a customer is a risk to the debtor finance company they are a risk to your business too.
To be in a situation where your business is beyond the start-up phase and growing is a significant achievement. However, it’s not a time to relax, and successfully navigating the business through this stage in its lifecycle will require plenty of attention to detail and your debtors are a detail you won’t want to overlook.
Rob Lamers, CEO of Oxford Funding (www.oxfordfunding.com.au)
