Financing A Growing
Many business owners are
happy to build a business they can easily manage themselves, or with a
partner or two. They simply do not want the headaches of having to run a
larger, more complex business. Others want to create a legacy business,
a prominent, lasting player in their industry with a great reputation.
Both approaches make sense because a private business is simply a
reflection of their owners' needs, aspirations, capabilities, comfort
zones etc. And of course too there is the unanticipated home run where
the imagination of the market is captured by the product and growth
cannot be held back.
This article focuses on creating a legacy business and dealing with that
lucky home run.
Growing a business requires an entrepreneurial mindset to articulate the
vision of where the business can realistically be in a given number of
years. Management must also build an organization capable of achieving
the plan. This organization must comprise people, systems and processes
that ensure the right things are done the right way at the right times
to first and foremost meet the needs of customers, and second, meet the
needs of all the stakeholders of the organization.
It is worthwhile to look at what happens to businesses as they grow.
In its infancy, a company is learning how to sell and operate and must
focus primarily on sales and cash flow. Common problems include running
out of cash, making a fatal mistake, and giving up because the initial
concept isn’t working. The best way to survive is to test your ideas
before committing significant resources, keep your cash flow positive by
minimizing overheads, frugal spending, and finding imaginative ways and
strategic partners to get the resources you need.
Businesses that survive infancy have gained a customer base, and are
generating a profit. It is still learning and making mistakes, but is
able to survive most minor setbacks. Management is mostly informal and
“everyone does everything” when spikes in activity are experienced.
Sometimes all at once it seems. There are few systems in place and
people and resources can get spread pretty thin due to insufficient
economies of scale that would allow hiring staff to focus on specific,
high volume, repetitive tasks.
At this point, the conscious decision is made to either grow, or remain
small. Whatever the decision, the keys are to stay focused on customer
needs, adapting where you have to, on learning and gaining experience,
and on cash flow and profits. Founders should figure out what they do
best and do it, and surround themselves with quality people, who have
the experience and strengths they lack. When hiring, ensure increased
activity and growth is in fact sustainable and not just a “blip”, and
grow in a balanced way, adding staff in such a manner that no part of
the business grows at the expense of another.
In the next stage, by either luck or design, the customer base, sales
and the company are growing beyond the ability of its people and systems
to manage it well. Here it become critical that founders start to
delegate and train and motivate, and begin to plan, organize, lead and
solve problems rather than focus on day to day tasks. The culture must
change as more formality is imposed on a previously undisciplined
organization, and more often than not, mistakes are made in actually
creating a structure or its information system. But good organizations
make headway as they measure activity properly and learn and adjust.
Those founders that can successfully make the leap and grow themselves
into capable leaders can take their companies to maturity, where the
company has strong, profitable operations, systems that work, capable
staff, and a solid base from which to grow further. The primary issue is
actually staying entrepreneurial and customer focused as bureaucracy and
complacency set in, and where employees feel like a cog in a large
machine. Keys to maintaining the edge at this stage are to remain
focused on customer needs, and to foster innovation in all areas of the
business to ensure those needs will continue to be met for the
foreseeable future. This sets the business up to become a legacy
business that survives the founder and takes on a life of its own.
No matter what stage you are in, continuously monitor your business to
make sure your business model is still viable, i.e., that your value
proposition is still valid, your revenue model is working, that your
anticipated costs are in line, that your margins are sufficient, and
that your overheads are not growing out of proportion to your means to
fund them. Make sure you include a desired profit in your overhead
calculation. Keep your eye on the competition and all factors that
affect your customer and supplier markets.
Running out of cash while growing, or wanting to grow and not having the
necessary cash, are common problems. Growth requires additional
investment in inventories and receivables, as well as in the growth
infrastructure, and it is not often easy to get because of the risks
involved. The lucky few can finance growth out of earnings, but many
must look outside the firm to personal resources, family resources,
institutional lenders, or equity investors.
The amount you need to finance can be calculated as follows.
First, understand what happens to your businesses’ finances as you grow.
You need to know by how much your cash, accounts receivable and
inventories will change if sales increase. To do this, you have a
history which you can use to predict what will happen if your sales
increase by say 20%. It may be that your cash will increase by 10%,
accounts receivable by 25%, and inventories by 18% because historically,
that is what happened. You may also have to invest in additional
technology, facilities, and staffing in order to support the increase in
It is worthwhile examining your credit policies and inventory methods at
this point to see if these requirements can be adjusted. For example,
tighter credit granting policies and more aggressive follow up of
delinquent accounts may be required. In addition, investment in better
inventory systems and predictability may also prove useful.
The key is to develop a credible, realistic, and attainable plan that
meets your goals and allow you to properly execute your strategies and
plans. And ensure you obtain all the financing you need up front. Do not
finance in steps or for the immediate future. If you do not need all the
funds now, get a commitment for what you will need in the future. And
use your accountant, lawyer, and whatever professional help you need to
properly structure the financing and help you get it. Make sure you know
what terms are going to be acceptable to you before you start looking.
There is a well developed market for financing in Canada and many
options exist for every type of financing you are likely to ever need.
Target the types of providers you need, and find out their preferences.
Then approach a “short list” and present your case. Let them present
what they can do for you, if anything. If they cannot, learn why and
move on. If their terms are unacceptable, negotiate and be prepared to
One final note. Never provide anything to lenders that you need to
protect yourself, your family, or your firm. Simply choose not to grow
for now, or grow more slowly. As the saying goes, be careful what you
wish for, you may just get it.
© 2015 John B Voorpostel CPA, CA, CMB