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Financing A Growing Business

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.

Financing growth

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 sales.

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 walk away.

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
iaccountant.ca


 
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