Growth without cash-flow strategy can sink a business

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Grow or die is often the credo of ambitious entrepreneurs. But growth can be hazardous to the health of small- and medium-sized enterprises without proper planning.

“Rapid growth is as dangerous for a small business as rapid decline because it often involves burning through a lot of cash,” says Steven Uster, CEO of FundThrough, Canada’s leading invoice funding service that gives businesses the ability to get their invoices paid in 24 hours instead of waiting 30, 60 or 90 days.

“And short-term cash flow — or lack thereof — is the No. 1 reason that small businesses fail.”

Growth is a priority for today’s entrepreneurs. In a survey of 1,000 SMEs by the Business Development Bank of Canada, managers rated the importance of growth at 7.1 out of 10. And almost 40 per cent ranked growth as the most important consideration.

Sometimes growth happens organically. The customers come to the business because it’s producing a service or good that appeals to them, and the business must ensure it can keep pace.

That’s why lines of credit, business loans and innovative fintech options specifically serving owners of growing businesses like FundThrough are so valuable, providing cash so the business can meet demand immediately.

In other instances, growth is more strategic. There’s a plan, and central to it is how expansion will be fuelled.

“When thinking about expanding, the most important consideration is making sure you have the required resources, both financial and human, to be able to accommodate that growth,” says Uster.

Don’t put the growth cart before the revenue horse, in other words.

“I like to ensure that revenue comes faster than cost,” Uster says. “As an entrepreneur myself, I don’t like to bring on another person to the team, for instance, until I know there is sufficient revenue.”

It’s better to make do with what you’ve got until you’re absolutely certain the revenues are there to cover an increase in overhead. The last thing entrepreneurs want to do is add more fixed costs only to realize later that sales are not as high as anticipated.

“Then you’re stuck with these new expenses to support,” he says.

One of the first steps to expanding smoothly is ensuring the existing client base is solid. Those relationships must run almost effortlessly before embarking on a new growth strategy.

“As you grow, you’re going to be focusing on that — be it a geographical or product expansion — and it’s possible you may take your eye off the existing business,” Uster says.

“So you’ve got to make sure your existing business is strong enough to be able to sustain itself so you can focus on the new aspects of the business.”

Part of shoring up the existing business is having reliable employees who can manage existing clients.

“You must have employees you trust, and who share your passion for serving and taking good care of your existing customers,” Uster says. “The worst thing that can happen is that you focus on the right hand with the expansion and the left hand isn’t keeping track of the older business the way you would have thought.”

It’s also important to have effective accounting and billing practices in place. And when the time comes, you want to ensure the cash is on hand to feed growth. That’s why setting up a funding facility ahead of time is vital.

“The easiest one up front — because short-term working capital is always that biggest issue and constraint as you look to expand — is an invoice funding platform set up and ready to roll,” Uster says

“It doesn’t mean you’ll necessarily have to use it, but you want to have it all the same so at any given time you can pull that trigger and use it to your advantage.”

Uster helped found FundThrough in 2014 to help SMEs access the capital they need to ensure that cash flow is never an issue.

FundThrough allows SMEs to collect on their invoices within 24 hours, so that they can start using the money they’ve earned right away to keep their business running smoothly when costs get ahead of receivables or the flexibility to invest in growth without having to wait on invoice payments to come due. It’s able to lend money where the banks cannot because they look extensively at the creditworthiness of a small business’s customers, rather than exclusively at the small business itself. And that gives them the fuel to grow now instead of waiting for pending invoices to be paid.

This story was created by Content Works, Postmedia’s commercial content division, on behalf of FundThrough.