Growing a Business Broke
Growing a business broke is not an uncommon phenomenon. Yet, it can be avoided or overcome with discipline and measuring the right metrics.
In the previous video we mentioned that there are only two uses for cash flow, namely
- Invest in growth, and/or
- to fund poor management practices.
Subsequently, let’s look at business growth and how to balance it with profitability.
Watch this 3-minute insightful video:
The challenge of growing a business
Growing a business comes with challenges. One of them being the cash your business needs to trade and grow, can outgrow the cash produced from trading.
Generally speaking, the business is growing broke. Moreover, you are outgrowing your ability to fund the business and you need go to the bank or investors for funding.
An important driver in growing a business
The saying goes “Sales is vanity, profit is sanity, but cash is king”. Therefore the challenge is to generate enough cash to be able to grow your business. Importantly, top-line growth – in other words growing sales – is an important driver.
Operating profit in a growing business
As a business owner or executive, you need to measure how efficient the business is operating. Moreover, you want to squeeze the most profit out of each Rand or Dollar of revenue.
This is measured by your Operating Profit %, simply calculated as Operating Profit / Revenue.
Guideline benchmarks for Operating Profit % for a growing, mid-sized business are the following:
- 5% – On Life Support
- 10% – Good, but untapped potential
- 15% – Great shape
- >15% – Market will start to push back in time
Are you growing your business broke?
As a business owner or executive, consider these questions in your growing business:
- Do you know, off hand, what Operating Profit % of your business is?
- In what shape is the Operating Profit % compared to the benchmarks mentioned above?
- How long can your business survive on the cash you have if your sales dry up today? 1 month, 3 months, 6 months, longer?
- How many days does it take your company to convert inventory or services sold, to cash in the bank? (By the way, here is a very helpful article you can read on Cash Conversion Cycle
If you can’t answer these questions, you definitely need some help with your monthly management accountability and/or reporting dashboards. Here is a great article about creating a Performance dashboard.
Look no further – help is right here
If you are
- the leader in a growing business,
- been in business for more than 5 years (past start-up),
- serious about scaling your business to the next level,
- will do what it takes to achieve your goals, and
- feel stuck and don’t have time to waste
and you need a more urgent discussion around your concerns, click THIS LINK to Barend’s diary and book a slot for a quick 20-minute chat about your cash flow needs.
Barend Cronjé is CoLAB CEO and Master Scaling Up practitioner. His passion comes alive when he helps business leaders solve their cash flow and other problems, so that they can BREATHE.
At CoLAB we are easy to deal with, very approachable, and we love what we do!
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